How to Invest in Commercial Real Estate
Commercial real estate investing is a safe, consistent, and profitable way to build wealth. However, your epic gains depend on your investment strategy, research, and understanding of fundamentals. Haven’t invested in commercial real estate yet? You are in luck. Before you begin your investing journey, it’s important to familiarize yourself with the various types of commercial real estate investment options.
Commercial Real Estate Investing & It’s The Property Types?
A commercial real estate investor is an individual who invests in the commercial real estate market for a profit, be it directly or indirectly.One can invest in the commercial real estate market by purchasing properties directly with the intention of holding, leasing, flipping, developing, etc. Otherwise, you can invest in the market indirectly by buying shares of real estate investment trusts (REIT) or syndications. Through these indirect shares, you can get dividends and appreciation, ultimately for the goal of profiting on the property. Directly investing in property allows you to have full control over your assets which can be highly valuable. That said, it also requires investors to take on more risk. In contrast, investing in REITs or syndications provides profit while requiring buyers to take on less risk.
How to Invest Indirectly in the Commercial Real Estate Market?
There are many different ways in which you can indirectly invest in the commercial real estate markets. The most common methods include purchasing shares of publicly traded real estate investment trust (REIT) stocks or investing in a real estate investment syndication that deals in commercial properties.
When investing in a REIT, it is important to research the trust to ensure that it is the right investment for you. Before investing your money in syndication, it’s a great idea to do research on the investment group and go through the historical performance trends of the group. It’s important to be careful about the REIT or syndication you pick because
they all operate in different ways and have different approaches. A trust or group with a conservative approach might not be a good fit for you if you have a high-risk tolerance, and the opposite can also be true.
How to Invest Directly Into Commercial Real Estate?
Before you buy commercial real estate you are going to need to get extremely comfortable with the words ‘due diligence.’ Due diligence is the process of conducting extensive research about the property, the market, and the surrounds of the property you are looking to buy.
Understanding property types in various locations will be a valuable use of your time. Learn a market, a product type, the numbers, and the players involved. Once you have a better understanding of the property and product types, you will know how to recognize potential risks and opportunities better than your competition. Familiarize yourself with investing fundamentals while doing your due diligence on said particular commercial property niche.
After you decide on the commercial property niche you have chosen to study, it’s time to uncover your investment criteria. These criteria will serve as a guide that allows you to identify your appetite for risk and what deals you would like to pursue. Talking to a local banker will help you determine your financing options prior to your property search and may help you beat your competition at the deal table. In commercial real estate, leverage can be used to your advantage. Leverage is the act of using borrowed money from a bank or entity while paying it back with interest.
As you accumulate industry knowledge, investment criteria, and financing options, it’s time to assemble your team. Contact a broker and a real estate attorney so they can bring you deals and protect you along the way. Your attorney is not a broker and vice versa. Additionally, a residential broker is not a commercial broker. Just because a family member works in real estate doesn’t mean they are equipped for the transaction. The same goes for legal. Find a proficient real estate attorney and broker.
Real Estate Trends for 2023
In a Deloitte survey, respondents gave a range of estimates for commercial real estate revenue in 2023: 40% of respondents think revenue should increase, 48% think revenue will decrease, and 12% expect no change. The same respondents identified the problems that will have the biggest effects on revenues over the next 1 to 1.5 years as being high inflation, workforce management, cyber risk, and climate change-related regulatory action.
Even though there may be a great deal of uncertainty on the macroeconomic front, there is still money to be made if you take the time to learn about a particular commercial property market. The estimated value of all commercial construction projects in 2021 was 101.8 billion dollars. Consequently, you can take advantage of a lot of opportunities that will be available to you.
The Bottom Line
Investing in the commercial real estate market is a terrific opportunity to create a lifetime of wealth. If you go the direct route, you must do extensive research on the property type, and financing options, and be aware of your investment criteria. Once you have the necessary information, you can contact a broker to find good deals and get in contact with an attorney to sort out your paperwork. If you choose to invest indirectly in commercial real estate, you must invest in a good real estate investment trust (REIT) or real estate investment group (REIG) after proper research.
