Are you interested in unlocking the power of commercial real estate (CRE) as an investment but need help knowing where to begin?
There's a lot to consider, from the different deal types to whether to go commercial or multifamily or something different entirely—but this doesn't mean first-time investors should be discouraged.
Learning CRE investing fundamentals will make you a more informed and confident investor, giving you a lifetime of knowledge in a traditionally robust, high-income investment type.
This blog looks at everything you should know about CRE investing and examines a commercial investment specialist group helping owners, tenants, and investors get the most out of CRE.
The Types of Commercial Real Estate
A wide range of properties come under the umbrella of "commercial real estate."
CRE is generally considered real estate that is not residential and includes:
Industrial spaces such as factories or warehouses
Multifamily buildings, such as apartment blocks
Before investing, it's essential to determine the differences between the real estate types and the associated risks and benefits. Within each real estate type, there are individual categories. For example, a retail space could be a multi-use strip mall or a free-standing singular retail space, like a street store.
These buildings are again further classified by age, state, and condition into (generally) classes A, B, or C.
The Benefits of Diversification
For investors looking to diversify their portfolio, CRE is a fantastic addition.
As commercial real estate relies on income from commercial lessees paying rent plus benefits from a longer-term investment outlook, the risks, payments, capital appreciation, and return profile differ from that of the stock market or residential purchase.
CRE investors can improve their risk-adjusted returns and hold a traditionally vital asset through volatile market conditions to hedge against inflation.
Cash flow is the net cash received after accounting for other uses of cash such as debt, capital charges, loan proceeds, and other expenses.
Since there are usually multiple ratepayers in a CRE space, a CRE investment can maintain a steady cash flow even when occupancy is below 100%.
Appreciation refers to the increase in the value of the asset over time. CRE investors can enjoy large capital gains payouts at the end of the deal when the property is sold. However, this benefit is not guaranteed and relies on several factors, such as market demand, property location, whether improvements were made, and more.
Types of CRE Investments
Due to developments in technology and the creation of group investments, investors can access commercial deals in today's landscape in many ways.
Some of the leading investment types include:
Limited partnerships: Limited partnerships include a general partner GP who underwrites and manages the deal and a limited partner (LP) who invests in the deal to receive passive income. LPs are not involved in the day-to-day administration of the asset and will receive dividends and a profit split upon the asset's sale.
REITs: REIT stands for "real estate investment trust," a private company that buys and manages commercial real estate and trades on major stock exchanges. Investors in this security are not investing in the property but rather in the REIT that holds the property in the portfolio.
Private equity funds are equity and debt investments often reserved for accredited investors who fulfill financial prerequisites. The investment amount is pooled from multiple investors, who are usually required to commit to longer-term investment time frames.
TIC investment: A "tenant in common" investment is a 'group' investment in which each investor holds an undivided fractional interest in a property. This differs from a limited partnership in that each investor must receive their pro-rata share of the amount invested.
§1031 Exchange: A 1031 exchange is an investment strategy in which investors defer capital gains taxes by reinvesting proceeds into another property. This allows for an increased portfolio and better gains. However, certain IRS conditions must be met.
Property Acquisition Considerations
Deal syndicators and private equity CRE deal-makers will consider several critical factors before settling on a piece of commercial real estate for sale.
Physical characteristics: This may include age, state, size, location opportunities for value-add upgrades, and more.
Underwriting: The underwriting process involves researching the asset's previous performance from rents, the potential for growth, and value-add opportunities.
Unique characteristics: This step examines the seller's motivations, whether tenants are in tow, and additional considerations linked to the asset.
Whether one or all of these factors meet your criteria, it's crucial to consider each factor before purchasing an asset.
General Due Diligence
Understanding the CRE asset is only one piece of the puzzle. Experienced CRE deal syndicators will also research the property location, market trends, internal migration, tenant base, demographics, financials, and other considerations.
For example, an investor in a strip mall close to real estate Chicago suburbs should consider the job market and average salary of the surrounding area.
Experienced professionals such as brokers and property managers experienced in the market can help mitigate issues and facilitate a positive investment experience.
Tax Offsetting and Benefits
A leading feature of CRE is the tax benefits, including depreciation deductions, mortgage interest deductions, and 1031 exchanges. Again, experienced deal managers such as the Brian Properties team can guide how best to access these advantages.
Learn Commercial Real Estate Investing Basics With Brian Properties
One of the most effective methods of building a robust portfolio with commercial real estate and grasping the basics is to partner with leading real estate specialists. The experts of Brian Properties are here to help you every step of the way, from understanding the basics to building a winning portfolio with commercial real estate that makes sense for you. Reach out to learn how we can help you find and manage commercial properties for your portfolio.
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