Commercial real estate can be an excellent investment for those savvy investors who know what to look for. But even experienced investors may not know everything about this complex and rapidly-changing market. Not to worry, we are here to help.
We will highlight some interesting facts on which many expert residential real estate investors might shrug their shoulders regarding commercial properties. We’ll also offer tips for those looking to get into this market. So, whether you’re a beginner or a seasoned pro, keep reading to stay ahead of the investing game.
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1.What are the Distinct Disadvantages and Advantages of Commercial Real Estate?
The biggest disadvantage for investors investing in commercial real estate is that it often requires substantial capital, which is beyond the means of the average residential investor. Most commercial real estate (CRE) investments are made through real estate investment trusts (REITs), crowdfunding, or partnerships. This helps facilitate retail investors’ access to real estate by reducing ticket size. However, a decrease in ticket size does not always indicate that an investment alternative is advantageous.
CRE investing offers distinct advantages over other conventional investment options:
- As real estate, it is not susceptible to market swings. It is a steady long-term investment choice with a constant rate of return due to longer lease terms.
- It has a lock-in period that protects your money and guarantees consistent cash flows.
- Commercial real estate in a prime location may be a gold mine, as it will be highly sought after by a specialized group of tenants. After all, the renewal of investment leads to passive income.
- Commercial tenants typically have larger cash flow
- Different classes of property
- Commercial property typically sells for a lot more
CRE investing disadvantages over other conventional investment options:
- Higher vacancy rates due to remote / hybrid work
- Different laws, regulations, and taxes
- More startup capital needed
SecondRE’s marketplace enables your investors to buy and sell fractions of cash-generating residential and commercial real estate properties, at an agreed price, and with your blessing as a sponsor. Sign up today to meet new investors.
2. How is Commercial Real Estate Different than Residential Real Estate?
Commercial real estate properties are far more costly than residential ones. Therefore, it is essential to have a significant quantity of funds accessible for investing.
Commercial real estate transactions are far more complicated than residential ones. A team of specialists, including attorneys and accountants, will likely be required to execute the deal.
Not many investors know this, but residential real estate includes Multifamily, not just single-family rentals and condos. When deciding whether to invest in a single home or an office/retail space, there are a few key factors to consider:
One is the amount of rental income you can expect to generate. You will likely have only one tenant with a single home or apartment, limiting your potential earnings. However, you can rent out individual units to multiple tenants with an office or retail space, providing a steadier income stream.
Another factor to consider is the amount of maintenance required. A single-family home will need more upkeep than an office or retail space, as you will be responsible for repairing any damage and keeping the property in good condition.
Finally, you should also consider the property’s location and the type of tenants you hope to attract. A single-family home in a desirable neighborhood may be your best bet if you are looking for long-term tenants. However, if you are looking for higher rents and shorter leases, an office or retail space in a busy downtown area may be a better investment.
3. Are the Benefits of Commercial Real Estate Investing Better than Residential?
Investing in commercial real estate may be emotionally and financially rewarding. Many invest in commercial real estate for future riches and security, while others do so for tax advantages and investment portfolio diversity. There are also other benefits to this endeavor, such as:
Higher Income
The most significant advantage of investing in commercial real estate is the opportunity for a larger income. The average return on investment for commercial properties is six to twelve percent, but the average return on investment for single-family homes is one to four percent.
Second, commercial real estate offers a reduced chance of vacancy since buildings often have more available units. One vacancy in an office building with 25 commercial spaces will negatively affect an investor’s bottom line more than one vacancy in a residential duplex.
Additionally, business leases are often longer than residential leases. This implies that commercial property owners will have far less tenant churn.
Cash Flow
Due to longer lease terms, commercial real estate offers a particular advantage-continuous revenue source. In addition, commercial buildings often have more units than residential properties, allowing you to scale and rapidly double your revenue streams. Many commercial tenants pay the building’s real estate taxes, property insurance, and maintenance fees, boosting the owner’s profits.
Longer Leases
Commercial buildings generally have longer lease terms than residential properties, which, as noted earlier, provide investors spectacular returns and substantial monthly cash flow. In many instances, business leasing agreements are negotiated for numerous years.
Less Competition
A further benefit of commercial real estate is the relative lack of competition. Due to the perceived difficulties of commercial investment, there are often fewer investors in the market. People prefer residential real estate because it’s easier. Even though commercial real estate is more complex, the rewards are bigger and better.
SecondRE’s marketplace enables your investors to buy and sell fractions of cash-generating residential and commercial real estate properties, at an agreed price, and with your blessing as a sponsor. Sign up today to meet new investors.
4. How to Begin Investing in Commercial Real Estate?
Individuals may participate in commercial real estate, but the high investment costs make it impossible for a single investor. It will be difficult to obtain the required amount in a commercial real estate organization.
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REITs
These operate similarly to mutual funds. Fund managers look after the REIT, and your investment is part of a pool of assets managed by the fund managers. They pick these assets based on their historical performance and market trends. The profits from all assets are pooled and dispersed to investors in proportion to their REIT fund participation.
Fractional Ownership
This encourages like-minded individuals to combine their funds to acquire an asset. The minimum ticket size is often a multiple of lakhs. Individual retail investors may hold one or more fractions of an asset, offering them a piece of ownership based on their risk tolerance and available cash. Returns from rent and capital appreciation are distributed proportionally to each investor’s ownership stake.
The primary distinction between the two forms is straightforward: with a REIT, a portion of your investment may lie idle in an asset that does not attract tenants for whatever reason. To avoid your investment from becoming a pricey paperweight, you must withdraw from the fund.
In contrast, fractional ownership provides total control over asset selection. In fractional ownership, you may continue to invest in other profit-generating assets and halt, sell, or exchange your partial ownership of a non-performing asset for another.
SecondRE’s marketplace enables your investors to buy and sell fractions of cash-generating residential and commercial real estate properties, at an agreed price, and with your blessing as a sponsor. Sign up today to meet new investors.
Secondary Trading (SecondRE)
The secondary market is where investors buy and sell properties that have already been purchased by another investor. While the primary market is the initial sale of a property from the developer to an investor, the secondary market is where investors trade properties with each other. The secondary market can be an excellent place for investors to find good deals on properties and unload properties they no longer want.
Because the secondary market is not regulated by the government like the primary market, it is important for investors to do their homework before buying or selling a property. However, with proper research, the secondary market can be a great place to find deals on commercial real estate investments.
With SecondRE, investors can purchase and sell fractions of income-producing residential and commercial real estate holdings at a predetermined price and with the sponsors’ approval.
How does it work? Easy, we will tell you more:
- Collaborates with Sponsors to choose qualifying assets. Asset and performance data is accessible through the Marketplace.
- Existing investors offer their assets for sale on the Market at a price of their choosing. Additionally, they may search for new discounts.
- The matching process starts. Accredited investors submit bids for investment opportunities. If a match is found, the Sponsor will authorize the transaction.
- Investors get regular updates and payouts from cash-generating transactions. They may also sell their holdings at any moment.
5. What are the Factors To Consider Before Investing in Commercial Real Estate?
As with any investment, sufficient research should be conducted on your desired CRE properties. Here are the most important factors to consider before investing in commercial real estate:
Location
The location has a significant impact on determining the performance of your commercial real estate investment. This applies to both residential and commercial real estate. Here are the factors to look for:
- Accessibility through roads and railways
- Major highways
- Proximity to airports and seaports
- Major roadways
These variables may make or break the asset’s value and potential for appreciation over time. A well-connected location near harbors and ports may be ideal for manufacturing tenants that export to or import from other countries.
The same site is not ideal for software operations firms. When investing in a big metropolitan market, you should also monitor the micro markets around the asset of interest for any changes that might affect your investment.
Market Dynamics
Commercial real estate does not experience the same market fluctuations as most conventional investing alternatives. However, market fluctuations impact the vacancy rate, rental rates, and occupancy stability. For example, the Covid-19 pandemic has resulted in fewer individuals traveling to office premises for work, so several commercial office space rents have decreased in several areas.
Keeping an eye on the firms that are shaking up the economy is a terrific method to determine the next commercial real estate asset you should be looking out for.
Tenancy
Existing tenants, their financial state, and the terms they are on may tell you a great deal about the long-term sustainability of the asset and the extent to which your investment will be profitable.
Historical information on lease periods and vacancies can give you an idea of what to expect if a vacancy occurs during the investment period. For example, general-purpose office space is more likely to be utilized than warehouse or laboratory space. However, the second property has an advantage over the first due to its superior capital appreciation and more consistent tenancy.
Liquidity
When it comes to commercial real estate investing, liquidity is an important consideration. The holding period is the length of time that an investor intends to hold onto a property, and it can significantly impact liquidity.
For example, properties that are held for shorter periods are typically more liquid, as they can be more easily sold or traded. However, properties that are held for longer periods may be less liquid, as they may be more difficult to sell or trade.
Additionally, the terms of the investment may also impact liquidity. For instance, some investments may allow for secondary trading, providing investors additional flexibility and greater liquidity. When evaluating an investment opportunity, it is essential to consider the potential liquidity to make the best decision for your needs.
Fortunately, SecondRE offers a high degree of liquidity for its investors. Because we allow for secondary trading on our platform, investors can sell their interest in a property at any time without waiting for the property to be listed on the open market. This flexibility gives our investors a great deal of control over their investments and helps ensure they can always get their money out when needed.
Related: Commercial Real Estate Holding Period Explained
Do Your Due Diligence
When it comes to investing in commercial real estate, due diligence is essential. This means learning about the property, the area, and the potential for growth. You’ll need to assess the risks and potential rewards of the investment and ensure you’re comfortable with both. It’s also important to clearly understand your financial goals and how the investment will fit into your overall plans. Only by doing your due diligence can you make an informed decision about whether or not to invest in commercial real estate.
Should You Invest in Commercial Real Estate?
Commercial real estate can be a lucrative investment, so the answer is “yes,” you should invest, but there are a few things experienced investors might not know. For example, not a lot of people know why liquidity is key. The whole goal is investors can maximize their profit if they can get in and out of investments quickly.
SecondRE was created with this in mind; we offer a wide variety of commercial real estate opportunities that are both liquid and profitable. So what are you waiting for? Sign up today to check out all our offerings and see how we can help you grow your portfolio.
