Investing in Commercial Real Estate - How it Works

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Birgo

WHAT IS COMMERCIAL REAL ESTATE

Commercial real estate is an investment of long-standing, tangible assets that give returns in two ways: first in the form of rent or lease returns, and second in the value appreciation of the property. Risks in this kind of investment are low, and this kind of real estate, as opposed to the purely residential real estate, comprises of office buildings, industrial property, hotels, farmland, and the such like.
The biggest attraction of real estate is the fact that land is what it is; it cannot be created and smart investors not only buy and sell commercial real estate according to the prevalent market demand but make it a lucrative proposition by adding ‘value’ features over periods of time.

Commercial vs. Residential Real Estate

Commercial real estate is comparatively less risk prone; leases being longer, generate more cash-stability; it is valued basis its usable square footage; however, the cost of investing is greater.

Do Your Homework

Before making forays into investing in commercial real estate, it makes sense to get the ‘feel’ of the market, the going rates, the feasibility, the good/bad things about doing business in the area you are considering investing in. It pays to consider the kinds of businesses already in place, and its proximity to residential areas.
Another important factor to consider is the seller’s cash-flow statements that will give insight into how the property fared in the preceding years.

Appeal of Commercial Real Estate

For the purpose of sheer returns, you can’t beat commercial real estate investments: In 2015 alone, the National Council of Real Estate Investment Fiduciaries (NCREIF) reported annual returns of 12.75%, racing ahead of other stock and bond driven investments.
Stable and rising cash-flows are the hallmark of commercial real estate investments, and this is the goal of any investor. Lower vacancy risk, even a panning out of the risk (multiple holdings) is a positive of this investment.
Longer leases on properties mean greater cash-generation, and sometimes, as in the instance of the triple net lease, the lessee could even be paying the building’s real estate taxes, property insurance, and maintenance costs, in addition to monthly rent.

How to Invest

Due diligence, in-depth market research, and accurate math are some of the steps one needs to take in the process of optimal investment:
– Operating costs- all required costs to run and maintain a property
– Cap rate- provides an estimate of future profits and/or cash flow
– Cash on cash- measures the returns on the cash investment
– It pays to upgrade your buildings for optimal returns.

Keeping in mind the basic pointers given above, the commercial real estate market beckons, and for the smart investor, the opportunities are manifold. So far, investment in commercially viable properties was limited to deep-pocketed investors, but lately, some legislations, including the 2012 JOBS Act, have made access to commercial real estate deal flows more commonplace, and platforms such as the CrowdStreet Marketplace give transparent information on such investment opportunities across the country.

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