Why should you invest in commercial real estate?
While residential investment tactics are well known to many real estate investors, many still don’t know why they should or how to invest in commercial real estate. If you mention real estate investing to most people, chances are you’re in a conversation dominated by reality TV-fuelled residential real estate movements.
Yes, we all know about selling residential property and all the money that was made until the bubble burst. We understand! But residential real estate is valued in comparison to sales, so what happens when these sales drop like a skydiver without a parachute and the number of sales is running out? You are left with a property that you cannot “spin and burn” in a short period of time and possibly one that you bought too much.
If you find yourself in a frozen credit market and have homebuyers who can’t get mortgages, your house is going to sit there bleeding out every month as upkeep costs rack up. While buying and selling or renting homes has its benefits as an investment activity, learning to invest in commercial real estate will not only help you make more money, but it will also broaden your investment horizons and provide you with some diversity.
Commercial real estate comes in many forms and is simply any property that is owned for the sole purpose of generating income for the owners. While single-family residential homes technically qualify, they are not commonly considered commercial investments. Office buildings, apartment complexes, land, hotels, and other types of property are what we’re looking at here when we’re learning how to invest in commercial buildings: apartments, malls, office space, and shopping malls.
Commercial real estate has an advantage over residential real estate in that its value is not based on comparative sales. Just because an office building down the street sold for $1 million doesn’t mean yours will too. When you invest in commercial property, you do so based on the income it generates. So if you want to increase your property value, just look for ways to increase income. This can be done by increasing income such as rents, storage, sales, or laundry fees, or by decreasing expenses such as maintenance, mortgages, or interest.
Commercial buildings with a unique set of challenges and benefits. Like any other investment, you need to weigh your risk tolerance, the money and time you have available to invest, and what the market is doing. Commercial real estate investing is the “big time” most part-time hobbyists graduate from having dabbled in residential real estate investing. Investors find the ability to manipulate value through increased income, diversification of risk across many tenants, and better leverage as reasons to leave the residential game to hobbyists and reality TV stars.