Investing in commercial real estate is a whole different ball game from residential property. They tend to be more expensive initially, you deal with a different type of customer, and the terms of occupancy are also fairly different. The main premise of commercial property is to turn a profit, at least more often than the reason for building residential properties, which is firstly (or at least should be) to house people. The strategy for investing in a commercial spaces is simple; you can either lease out the property for rent over time, or you can let the value appreciate over time.
Investing in commercial spaces can provide the educated investor with handsome returns, even in times of inflation, and it provides diversification of their portfolio. Unlike equities which are traded frequently, real estate is considered a “hard asset”, or a scarce resource. Its value is intrinsic, and unlike stocks and bonds which are purchased for their selling potential, real estate in general is purchased as a potential income source.
Below, we look into the ways of investing in commercial real estate, in order to help you make an informed decision.
Depending on the type of property you choose to invest in, your tenants will differ, and so will their needs and contract agreements. The following are a few, but not all, examples of different types of commercial real estate to invest in.
- Office spaces
The usual lease duration is between five to ten years. The space itself could be one open space with the provision to add internal walls to create meeting rooms and smaller office spaces, or space for cubicles. Add value to these by furnishing with quality furniture and technology such as awesome room scheduling software from Pronestor. Typical office space tenants may be start-ups or estate agents.
- Industrial spaces
These would typically be warehouses and have a lease of over five years. Typical tenants for a warehouse may be factories, storage or distribution businesses. Usually, they would not be located in “prime” areas where you would find residential or retail properties, however, they would almost certainly be very accessible to main roads due to the need to accommodate big vehicles.
These would be buildings with multiple apartments and would usually have families or individuals as tenants. In general, the leases would be much shorter than office or industrial spaces, with a standard of one year, it could even be as low as monthly. By having more tenants, keeping account of payments could be more work, and expect a higher turnover.
Appreciation and added value
The second investment option for potential returns would be hold onto a property as it’s value appreciates over time. However, there is no guarantee that it will rise, and that is one of the risks of investing in property. External forces such as those that caused the Financial Crisis in 2008 could cause the value of property to plummet, no matter what the investor has done in order to increase it.
Real estate is scarce, so as demand increases, usually the value follows, and vice versa. Less availability in an area of high demand could push up the rental prices, as well as the prices prospective buyers are willing to pay. As an investor, getting into an area with such potential early and selling when the price has appreciated to an adequate level is a good way of investing, especially in the long-term.
A more proactive, and usually quicker approach to increasing the value of commercial real estate, or any real estate for that matter, would be to “add value”. This basically means improvements are made to enable it to command a higher income. For example, this could be done through refurbishments to apartments; adding new equipment and furniture, allowing you to charge a higher rent.
Investing in commercial real estate may seem out of reach for many people, but if you do your research online you’ll find many companies that legitimately allow you and others, to pool your money together and invest.