Some basics of commercial property investments
Buying commercial property
Most property investors will tend to stick with investing in types of properties they know best, and feel most comfortable managing – usually residential real estate. But for those who are looking for greater profits at a quicker pace, then commercial property should be considered as well. Most investors will not be as well versed or comfortable with commercial property, so there is definitely more specialization required when investing in it. In addition, the absolute dollar amounts required (as well as financed) tend to be much greater than with residential property investing. With more risk comes more potential for return.
Unlike houses, commercial properties almost uniformly derive their value from rental income, not so much from general market appreciation. The greater the rental income, the greater the value of the commercial property. If you can purchase a building where rents are low, then manage to increase the rent-roll on the property, you can increase the overall value of the building. In addition, the quality of the leases you have with tenants in a commercial property will help determine its value. Poor tenants (read: poor paying) with very short leases will yield a less valuable property compared with a building that’s locked up with very strong tenants on long-term leases, with rent escalation clauses built into those leases.
Types of commercial investments
Commercial property investment runs the gamut from small apartment buildings to large-scale ones, small office buildings to large high rises, as well as office parks, shopping centers, strip malls, and many types of industrial buildings, including warehouses, manufacturing buildings and industrial parks.
With each successive commercial property type, the level of sophistication and specialization for that particular form is required. In may ways, relative to residential property investments, commercial properties require much less estimating and speculation, and therefore risk is actually lessened because as is the norm, actual income statements can be analyzed from existing, performing properties. That’s not usually the case with residential rentals, where the investor needs to make guesstimates as to market rents for vacant units, as well as for many expense items, such as fuel and electrical consumption. With commercial, past performance of a building will dictate it’s market value.
In addition, the high cost of most commercial property will be out of financial reach for an individual investor. However, investors can pool their financial resources (and credit lines) to form investing groups. Also, investing is Real Estate Investment Trusts (REIT’s) is also very popular. These are usually publicly traded funds that, like any stock-type of investment, you’d be simply investing in without having a say in the management of their respective property portfolios.
photos courtesy of ellara-marble.com, rojasrealtygroup.com, phaorient.com