The world is teeming with investment opportunities. Maybe you’ve looked into day trading or stock options, but you’ve been told real estate provides one of the highest ROIs in the long run.
If purchasing multiple single-family homes and renting them out to tenants doesn’t sound like the type of investing you’re looking for, commercial real estate might be a better option for you.
Knowing how to buy commercial real estate – including financing options and what properties are worth investing in – can give you the confidence you need to move forward.
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Commercial property refers to real estate intended for generating income. Buildings with living spaces are classified as residential or commercial based on the number of units each has. If a building has four or fewer residential living spaces, it’s considered a residential building. If a building has five or more residential units, it’s considered commercial property.
Commercial real estate (CRE) property includes office buildings, medical centers, retail stores, hotels, and warehouses.
There are five main types of commercial real estate. Each is divided based on the purpose of the space and will likely provide different levels of ROI based on location, function, and size.
Commercial Real Estate Property Type |
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In some instances, a sixth category for special properties can be used if the property doesn’t clearly fit into the five previously mentioned.
The types of commercial real estate can be further broken down into the quality of the asset. This system is often referred to as grading and has three different classes – Class A, Class B, and Class C.
Commercial Real Estate Gradings |
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So, why invest in commercial property in the first place? Keep reading to learn about some of the benefits of investing in commercial vs. residential property.
Tax reductions, portfolio diversification, and return on investment are some of the biggest benefits of knowing how to buy commercial real estate. However, they aren’t the only ones.
Knowing how to buy commercial property can make the task feel more attainable. This process includes building your network, identifying available opportunities, quantifying your potential return, securing financing, and finally, closing the deal.
The intricacies of each step will vary depending on your specific investment strategy, available funds, and experience.
By building your network, you open doors to opportunities that are closed to outside investors. The best way to build your network is to find mentors who are willing to help you reach your goals.
Learning from those who have gone through the process is just the first step in knowing how to buy commercial real estate. Connecting with private investors, attorneys who understand real estate law, real estate agents, and property managers who can all offer their advice and services is crucial for being a successful commercial real estate investor.
Here at Revolution Realty Capital, we’re more than just a lender. We’re also a team of private investors with on-the-ground real estate experience to offer expertise throughout your investment journey.
Additional education methods include:
Investor Tip: By learning how to underwrite your own commercial real estate deals, you can save money and improve your profit margin. |
Before buying commercial real estate, ensure your investment will be profitable. You can do this by looking at the purchase price compared to similar building values in the market, current net operating income, and any repositioning opportunities.
Other considerations:
Return on investment can be calculated a few different ways. However, the property investment return method is generally preferred by commercial real estate investors as it takes into account rental income.
Property Investment Return:
[(Monthly Earnings x Length of Time) / Property Value] x 100%
For example, let’s say a commercial property is worth $800,000 and earns $10,000 each month.
Property Investment Return:
[($10,000 x 12 months) / $800,000] x 100% = 15%
Your property investment return would be around 15% in this example. However, keep in mind that ROI isn’t the same as profit. Other expenses, including loan repayment and maintenance costs, will eat into your bottom line.
Investor Tip: By learning how to underwrite your own commercial real estate deals, you can save money and improve your profit margin. |
Numerous financing options exist for commercial real estate investments. Typical requirements for securing such financing often include an adequate down payment, exit strategy (for hard money loans), and equity or sufficient collateral.