While residential investing tactics are well known to many property investors, many still do not know about why they should, or how to, invest in commercial real estate. If you mention real estate investment to most people you will most likely find yourself in a conversation dominated by reality TV fueled residential real estate moves.
Yes, we all know about flipping residential properties and all the money that was made until the bubble burst. We get it! But residential real estate is valued on comparison sales, so what happens when these sales are dropping like a skydiver without a parachute and the number of sales are drying up? You’re left with a property that you can’t “turn and burn” in a short amount of time and possibly one you bought too high.
If you run into a frozen credit market and have home buyers who can’t get mortgages your home is going to sit there bleeding you every month as you rack up carrying costs. While buying and selling or renting houses has its benefits as an investment activity, learning how to invest in commercial real estate will not only help you potentially make more money but will also broaden your investment horizons and provide you some diversity.
Commercial real estate comes in many forms and is simply any property that is owned with the sole purpose of creating income for the owners. While single-family residential homes do technically fit the bill, they are not commonly considered to be commercial investments. Office buildings, apartment complexes, land, hotels and other types of property are what we are looking at here when we are learning about how to invest in commercial buildings – apartments, shopping centers, office space, and strip malls.
Commercial real estate has an advantage over residential in that its value is not based on comparison sales. Just because an office building down the street went for $1 million doesn’t mean yours will too. When you invest in commercial property, you do so based on the income it creates. Thus, if you want to increase the value of your property you simply find a way to increase income. This can be done by increasing revenues like rents, storage fees, vending, or laundry or decreasing expenses like maintenance, mortgages or interest.
Commercial buildings with a unique set of challenges and benefits. Like any other investment you must weigh your risk tolerance, money and time you have available for investment and what the market place is doing. Commercial real estate investing is the “big time” that most part time amateurs graduate to after they have dabbled in residential real estate investment. Investors find the ability to manipulate value through increasing income, diversification of risk through many tenants and better leverage all as reasons to leave the residential game to amateurs and reality TV stars.