How to start investing in commercial real estate: A beginner’s guide

One of the primary reasons people buy homes is to rent them out to others. Once you dive into the industry with this goal in mind, you already qualify as a commercial real estate investor.

As you might have guessed, getting started in commercial real estate isn’t an easy task as you’ll face some tests before you find your feet. These experiences are a natural part of the journey to becoming an experienced real estate investor.

Thankfully, you don’t have to go through the unfavorable parts of the process. In this article, you’ll learn how to start investing in commercial real estate without losing tons of money.

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Table of Contents

What Is a Commercial Real Estate?

This concept needs no introduction if you’ve previously delved into property investment. Commercial real estate refers to property that an owner rents out for business and commercial purposes rather than residential.

Investing in commercial real estate is the purchase, sale, or development of these properties. A commercial property investor is a person who invests in commercial real estate.

In a move referred to as “owner-occupied commercial real estate (OOCRE),” the investor may choose to use the property for commercial gains himself. Compared to renting, using OOCREs gives the business more control over the space they use for commercial purposes.

Types of Commercial Real Estate

Knowing the types of properties involved will help you better understand how to start investing in commercial real estate. Generally, the idea of commercial properties is pretty broad; however, we can categorize them into five primary types.

Here are all five types of commercial real estate.

1. Multifamily

Multifamily homes are a breed between residential and commercial buildings. They are simply homes with multiple separate units contained within one structure. Examples of these units are apartments and condominiums. It’s classified as a commercial property if the housing units are more than four.

2. Office

Commercial office buildings may be both single-tenant offices to enormous skyscrapers, and you can group them into three main categories: Class A, B, and C. The classification typically depends on the property’s location, quality, and state.

3. Retail

Retail buildings may range from retail stores to shopping malls, shops, showrooms, convenience stores, banks, restaurants, etcetera. These retail buildings may be between 5,000 square feet to 350,000 square feet, mainly located in urban areas.

4. Industrial

Industrial buildings may range from warehouses and light assemblies to heavy manufacturing buildings. They’re strictly for industrial purposes and vary in size.

5. Special-Purpose

These buildings are commercial houses that don’t fall into any of the above categories. Constructors build special-purpose buildings to serve a specific purpose; they may include buildings like schools, stadiums, theaters, amusement parts, etcetera.

These are the major property groupings involved in a real estate investment. Now you know what you want to invest in, it’s imperative to touch on the pros and cons of delving into commercial property investment.

Why Should You Invest in Commercial Real Estate?

While most investors’ primary reason for going into any investment scheme is to earn a high-income stream while expanding their portfolio, there may be more advantages in the investment medium than you think. Here are some of the reasons to invest in commercial real estate.

1. Income

Investing in multifamily real estate provides you with a steady income flow thanks to the monthly rents from tenants. Since most tenants are commercial businesses like factories, schools, hospitals, or warehouses, these properties generate higher income than regular properties, and the tenants pay promptly.

Additionally, commercial tenants usually take responsibility for covering some recurring expenses like taxes, insurance, and maintenance, leaving you with more money in your pocket.

2. Operational Hours

One of the many non-financial advantages of investing in multifamily properties is that it takes less time to manage them than residential properties. This advantage allows you to invest your time in other ventures if you self-manage the investment commercial property.

3. Networking

You can interact productively with your tenants and gain indispensable knowledge through these neighborly interactions. Furthermore, you may form professional relationships that can impact your career positively since all of your tenants are commercial businesses.

How to Invest in Commercial Real Estate

Once you decide to go into the investment medium, your next move should be to take time to understand how to start investing in commercial real estate. One of the basic principles is to know that it’s entirely different from residential real estate.

Properties are valued differently; leases last longer, and it’s harder to maintain a commercial property investment than a residential one. This simple fact explains why it’s more profitable too.

Furthermore, understand that location is essential to the success of your investment. Try learning the type of commercial property you want to invest in, as it’d help you identify potential tenants.

To carry out successful commercial real estate investments, you may have to familiarize yourself with basic investment terms and calculations. You’ll be working on finances, and understanding finances involves formulae and calculations. Consider investing your time understanding standard terms like the cap rate, net operating income, and cash-on-cash.

It also helps to familiarize yourself with the local real estate market because your familiarity with the market impacts the quality of the property you’ll get. Networking with other real estate investors and syndicators will give you a better shot at success.

Talking about familiarizing yourself with the local real estate market, you may not always invest in a familiar locality, and understanding an entirely new market might be time-consuming. Consider getting a good realtor to help you through the problematic aspect of exploring other locations.

Once you have enough knowledge to invest in your first commercial real estate, you may want to start from triple net leases. NNN Deal Finder deals in acquiring commercial real estate properties using triple net leases, and you can reach them at https://www.buynnnproperties.com/

Conclusion

Commercial real estate is a more lucrative niche industry and more demanding. For beginner investors, it’d help to take time to study the market and carefully evaluate your options, so you don’t make wrong investment decisions that will lose you money.

When accumulating knowledge about commercial real estate, you can start with internet articles like this one. Over time, you’ll build your repertoire of skills and expertise until you’re confident about making investment decisions in commercial real estate without help.

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