Commercial Real Estate

Commercial Real Estate Investing

Commercial real estate investment is not the playing field of the carefree investor. It requires putting in effort and time to ensure you invest properly. Commercial real estate includes business and office structures, factories and industrial buildings, and other retail spaces used for commercial purposes.It is a broad term which includes buildings like apartment buildings, business complexes, medical facilities, company offices, shopping malls, hotels, warehouses, farms, factories and manufacturing plants.

Many commercial real estate properties are usually rented or leased or owned depending on the circumstances. It is of note to know that commercial real estate generates income for the investor in two major ways. The first is through income earned through the use of the building by rent or lease. The second channel is through appreciation which involves an increase in the value of the commercial property over a given period of time.

Valuation of the property

However, a major challenge of commercial real estate investment is in valuing the property to know the actual worth before selling it or buying it. Unlike residential real estate where an investor can determine the worth of a property from the generally-known cost of similar building type in the real estate industry, commercial real estate is more complex because they are unique and have no similarity. Each property is distinct and is usually valued while considering the income-generation capability, the market cap rate, machinery and equipment, current rent and lease structure in place, and the credibility of the current tenant/ tenants.

It must also be said that the value of a commercial real estate asset can also be determined by the current state of the nation’s economy and how well-positioned the company is. In addition, commercial real estate often requires more capital investment, experience and effort from the investor.

If you are a new entrant in the real estate industry, it might a better option to go for residential real estate first to build experience and expertise even if you already have enough funds before delving into the deeper waters of commercial real estate investment.

Financing the property

The good news is that private and public lenders like banks are more eager to lend an investor funds to acquire a commercial property provided all parameters are met. This means that you as an investor need to carry out a thorough market research and due diligence.  Commercial real estate usually commands more leases than residential properties which means as an investor, you will have more cash flow when you invest in this type of real estate.

Lenders will offer their assistance to an investor interested in a commercial property more than one who’s investing in a residential property because of the repayment structure in place. Commercial property investment when serviced with a loan usually comes with what is called a balloon payment. It involves paying off the total loan due after a specific period which might range from 5 to 10 years. Paying this off isn’t always feasible so usually refinancing is usually the next option.

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  • David | Mar 2,2018

    Balloon payments scare me off. Is this the only way to do commerical?

  • George | Mar 3,2018

    Sounds like the bigger money is in commerical buildings over residential. Is it hard to switch to commerical?

  • Nathan | Mar 3,2018

    Would it be expensive to hire someone to get the proper valuation until I get a good hang of it or is that just crazy?

  • Ralph | Mar 4,2018

    This is something i’m working on. It is a difficult task trying to get the correct figure. It can be a little stressful at times.

  • Andrew | Mar 6,2018

    Difficult field but great income potential if you get the hang of it.

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