3 Things You Need to Know About Investing In Commercial Real Estate

Article Courtesy of Catherine Way :

Commercial real estate is ripe for high payouts, and great investment opportunities. For real estate investors looking for a new way to build a one-of-a-kind passive income.

With endless opportunities and an ever-expanding landscapes, commercial real estate offers an exciting portfolio for the investors who dare risk it.

Ready to start your commercial real estate investing journey? Get what you need to know to start investing in commercial real estate below!

3 Types of Commercial Investments

Commercial Investments offer many different styles, types and endless possibilities for every investor. Picking the right investment for your first commercial real estate property is key to building your revenue flow, and each type comes with varying issues, tenants, and rewards!

Here is a quick breakdown of 3 common types of commercial real estate investments:

Apartment Buildings: These would be large Multi-family units with lease terms to one year, or more. Housing for large numbers of individuals, families and more, this has a large opportunity for large payouts, and large hassles. These types of buildings have more tenants, more leases to manage, and more payments to confirm each month. The highest cost for this investment would be managing the property.

Offices:  Looking to get more professional tenant? Offices are a great investment for commercial real estate investors looking for steady passive income, and easy tenant management. Other investors seize the opportunity for coworking spaces, or layout the building to fit multiple businesses, and multiple industries. Payments are more reliable from companies, and leases run five-year to ten -year range. Watch your local job market to make sure that businesses are growing in your area, so you can hit 0% vacancy.

Industrial: Industrial opportunities are great for those looking for low maintenance tenants, but can be costly to insure. From distribution centers, manufacturing, and even factories, a typical tenant lease might be 5-10 years. 

How To Find A Great Commercial Investments

Finding a great commercial investment doesn’t have to be tricky. The best way to find the right commercial investment opportunity is to know how to value your investment.

Commercial investments vary from residential real estate, with most of the value of your investment is tied to the usable square footage of your commercial investment. They also offer  larger flows of passive income, and longer periods as the lease terms are almost 5 times the length of a residential rental.

The key to finding the best commercial investments? Looking for the little details, and the fine print. Usable square footage is going to see the highest return, and any maintenance and large ticket repairs will have to be updated before a tenant will even look at your property. Have an in-depth knowledge of the investment history, repairs, tenants, complaints, issues, and etc. All of this will help you make an informed decision, and know exactly what you are getting yourself into before you take on the property.

Finally, when looking at a commercial real estate investment you need to have a battle plan, run your numbers and know how exactly you will profit from the investment, and what your exit strategy is. For investors looking for commercial real estate loans, lenders will need at least 30% down payment.

After your cost analysis, repairs run-down, and exit strategy are in place, you can feel more confident in knowing your commercial investment is a smart choice for your bottom line.

Important Numbers for Commercial Real Estate Investments:

There are many numbers in real estate investments, without them how could you even tell if a property was profitable, and how to make the most bang for your buck! While most real estate investors know how to check for return on interest (ROI) and after repair value (ARV) for commercial real estate investors need to know how to calculate for a profitable commercial investment.

These are two must know calculations for your real estate investment.

Net Operating Income (NOI)

NOI helps commercial real estate investors find the profitability for a particular investment. Here is the key formula for finding your NOI for an investment. Investopedia lays out the formula neatly:

Net operating income=Real Estate Revenue −Operating Expenses.

NOI is the most important number a  commercial real estate investor needs! A property with a positive NOI can be a promising investment.

Cap Rate

Cap Rates might not before every real estate investment. Cap rates, or Capitalization rates is used to determine the value of the income-producing properties. Here is Investopedia’s Formula for finding your Cap Rate:

Capitalization Rate = Net Operating Income / Current Market Value

You can also use Cap rates to find the present value or future cash flow of an investment. You can use this for multiple tenant properties to get a better idea of your possible cash flow.

Summary

  1. 3 Types of Commercial Investments: For first time commercial investors choosing between offices, industrial, and large multi-family apartments will be a common choice. There are many pros and cons to each so do your homework!
  2. How To Find A Great Commercial Investments: Finding commercial investments with usable square footage, and taking a closer look at  properties history, repairs and tenants is a great way to find a good investment.
  3. Important Numbers for Commercial Real Estate Investments: Knowing how to calculate your NOI and Cap Rate to make the most of your commercial investment. Determine your highest profit, and play your numbers will lead you to steady passive income for years to come.

What is one thing about commercial investing you need to know?

 Thank you Catherine Way for writing this article for Peer 2 Peer Real Estate

About the Author: Catherine Way graduated from Michigan State University with her Bachelor of Advertising, with a specialization in Graphic Design. She is a content marketer for business, mortgage, and real estate industries. She has written real estate articles for Silver Doctors, The Paper Source, Active Rain, and Progressing Income. She enjoys finding new creative outlets through writing, designing, dancing, modeling and more. She currently writes and reports for  Prime Plus Mortgages – Hard Money Lenders Arizona