Building Big Profits in Commercial Real Estate
Most people often refer to real estate as the safest type of investment. In fact, real estate investments when done intelligently, can result to great profits. This is one reason why some people pursue real estate investment as their full-time job. When it comes to real estate, we often focus on residential real estate, whereas commercial real estate seems to take a back seat.
What most first time investors don’t realize is that, commercial real estate is a great form of investment, if not the best one.
As the saying goes, “greater risk comes with greater reward,” which applies to investing in commercial real estate properties. Compared to residential properties, commercial real estate requires a higher investment but one with greater cash flow and return.
How Profitable is Commercial Real Estate?
Investment comes in different types and forms and some of the most successful investors have proven that investing in commercial real estate generates the highest returns. It dates back from John Jacob Astor, the first American millionaire who made millions through investing in commercial real estate. This remains evident today through the flourishing success of the commercial real estate investors who are included on the Forbes list of the richest people in the world.
Commercial real estate has a wide variety of types that are classified into different categories; Office, Multifamily, Retail, Industrial, Leisure, and Land and each category has its own set of advantages and drawbacks.
People who are not familiar about commercial real estate only relate it to office complexes, factories, and industrial units. However, that is not all. Commercial real estate is a broad term that offers a number of different opportunities and developments. In fact, even residential properties like apartments (or any property that consists of more than four residential units) are considered commercial real estate. Below are good examples of commercial properties under each category:
- Multi-Family – Condominiums, Townhouses, Apartments, Commercial Villas
- Retail – Shopping malls, Groceries, Convenience stores, Clothing shops
- Office – Office buildings, Office spaces, Serviced offices
- Leisure – Hotels, Spas, Restaurants, Bars, Coffee Shops, Recreational Facilities
- Industrial – Warehouses, Factories
- Land – Raw Lands, Infill lands, Rural Lands, Urban Lands
It Can Create Regular Passive Income.
After knowing the different types of commercial real estate, the next big question is, “is it really profitable?” Buying or leasing real estate for commercial purposes is very different from buying a home or even buying residential real estate. The only thing with commercial real estate is that recognizing the opportunity is a bit difficult as compared to residential real estate. But its profits can be really big and beneficial.
Commercial real estate is a business that is continuously generating income. Regardless of the sales, it is still earning an income through the cash-flow of the commercial property. Since its income does not rely on the sale of the assets, commercial real estate has the ability to pay out regular cash distributions which in return gives the investor an ability to overcome recessions with greater patience and to cover the future problems with greater security.
It Has a Growing Capital Value.
It is common for commercial properties to increase its value significantly through time. This is even a bigger reason why it is able to produce massive amounts of wealth. In fact, it is proven to be the only investment type that has greatest hedges over inflation.
There is a significant increase in rents due to inflation. But since the value of commercial real estate is highly dependent on rental rates, as the rent increases, the value of the property proportionately increases as well. The cost of building new properties is also driven by inflation, which then forces the values of the existing real estate properties to go up to reach the new property values.
After the capital appreciation, the investor can take up their commercial investment property for either reselling or for renting out to, simply put, retailer. Commercial real estate development is in fact treated as the first sign for the growth of residential real estate. Once the possibility of significant commercial growth in the region has been understood (either due to tax breaks or whatever), the investor can begin evaluating the potential for appreciation in the prices of commercial real estate and then go for it quickly as soon as you find a good deal. And you must really work towards getting a good deal.
If you find that commercial real estate, e.g. land, is available in big chunks which are too expensive for you to buy, you could look at forming a small investor group (with your friends) and buy it together (and split the profits later). In some cases e.g. when a retail boom is expected in a region, you might find it profitable to buy a property that you can convert into a warehouse for the purpose of renting to small businesses.
It Gains Multiple Return on Investment Through Leverage.
Leverage is a strategy applied in both businesses and investments. The concept of leverage originated from a principle in physics where objects are lifted easily through a lever. Without lever, raising an object would be more difficult. In investment, the concept of leverage refers to the act of using debt instead of the original equity to acquire multiple potential return on investment. It involves cash from loan, acquired to fund a company’s growth through purchasing assets. Without leverage, the growth would not be possible from the benefits of the gained additional funds.
Most of the investors do not purchase commercial properties with 100% cash immediately. They usually cash down 20% to 30% downpayment whereas the rest of the whole payment is paid with a mortgage. This is the same strategy that made John Jacob Astor very successful in obtaining real estate. It is one of the most fundamental reasons why real estate is the most outstanding among any type of investment until today. The excellent performance of commercial real estate is also the reason why most of the trusted banks are confident to make loans on commercial properties. Unlike stocks which are often irrationally prone to having value fluctuations, it is based on stable rents making its values very rational in state. Through leverage, the investment becomes more worthy because of a much greater gains earned rather than any other form of investment.
It is Based on Basic Necessities.
The strong foundation of commercial real estate is highly-dependent on its clients. Nevertheless, it does not run-out of clients because it is mainly based on basic necessities. It includes shelter (multi-family houses, commercial villas, apartments, and condominium units), storage (industrial warehouses), production of basic needs (factories), and basic services (offices and retail). In a nutshell, commercial real estate is based on a high, perpetual demand.
It Serves a Diverse Demographic.
Commercial real estate does come in various forms, thus serving a diverse demographics. Most importantly, it caters to multiple sets of tenants. Therefore, it is not solely reliant on the rental of just one tenant but a great number of tenants. This gives the investor a sense of balance and diversity. When one tenant leaves, the business can still stand sturdily having a minimal effect on the property’s finances and still having several tenants to serve. In other investment forms, the investor is completely tied to the business that if it fails or performs poorly, the investment would greatly be affected.
The Bottom Line.
Commercial real estate presents a whole and complete set of investment opportunities, you just need to grab it, grow it, and maintain not only the progress of it, but most importantly a sensible and practical attitude towards it. Massive profits can really be daunting and overwhelming at first. Living proofs are some billionaires who watched their wealth slip through their fingers due to circumstances that are sometimes beyond their control but mostly because of their own actions and bad investment decisions. But with the help of an expert, proper preparation and conducting your own due diligence, you’ll be well on your way to earning passive income through this venture.