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6 Things To Know About Investing In Commercial Real Estate

  • Dec 08, 2022
  • Real Estate
Investing in commercial real estate

Are you looking to get your feet wet with investment in commercial real estate? Get a good introduction to some of the less obvious aspects of investing in commercial real estate (such as the importance of doing due diligence and understanding taxes) and understand how to get started on the right foot.

What is Commercial Real Estate?

It is a property that is used solely for business purposes. This can include office buildings, retail properties, warehouses, and more. Unlike residential real estate, which is mainly bought and sold for personal use, commercial real estate is usually bought and dealt with to generate income.

Here are some aspects to regard when investing in commercial real estate. For one, you'll need to have a clear understanding of your business needs in order to find the right property. You'll also need to be aware of the different types of investment options available, as well as the potential risks involved.

However, if done correctly, investing in commercial real estate can be a good way to generate passive income and build long-term wealth. If you're thinking about getting started in this area, here are a few things you should know.

How to Effectively Determine Your Target Market

There are some things to consider when determining your target market for commercial real estate investing. You must remember that your target market should be based on the type of property you are looking to invest in. For example, if you are looking to invest in office space, your target market would be businesses or organizations that would need office space.

Another important thing to consider is the location of the property. The closer the property is to where your target market exists, the more likely they are to be interested in leasing or buying it. Additionally, you'll want to consider the demographics of the area surrounding the property, as this can impact who your target market may be.

Once you have an understanding of who your target market is, you can start to look for properties that fit their needs. This can narrow down your search and help you find the perfect investment property for your portfolio.

Location, Location, Location

Investing in commercial real estate requires a different mindset than residential real estate. With commercials, it's all about location, location, location—the three L's of commercial real estate.

When it comes to finalizing a location for your commercial property, you need to think long-term. It's not just about looking for a place to put your business now; you're looking for a place that will be advantageous for years to come.

Good to understand some things when considering locations for your commercial property:

1. Proximity to complementary businesses: You want your business to be near other companies that complement yours. For example, if you're opening a restaurant, you'll want to be near other businesses like supermarkets or food suppliers.

2. Foot Traffic: The amount of foot traffic in an area is an indicator of how successful your business will be. Look for areas with high foot traffic and plenty of people passing by your storefront every day.

3. Parking: Is there enough parking available for customers? If not, they're likely to take their business elsewhere. Make sure there is adequate parking available close to your commercial property.

4. Zoning Regulations: Before investing in commercial real estate, make sure you understand the zoning regulations in that area. You wouldn't want to invest in a property only to find out later that you can't use it for the purposes you intended!

Building a Strong Tenant Portfolio

Given the higher risks associated with investing in commercial real estate, it’s important to take a cautious and disciplined approach when building your tenant portfolio. Focus on creating a diversified mix of tenants that will help minimize your overall risk.

Look for tenants that have strong financials and a history of timely rent payments. These tenants are less likely to default on their lease, which can put your investment at risk. Diversify your tenant base by industry, size, and length of the lease to further reduce your risk.

It’s also important to consider the location of your property when selecting tenants. Look for properties in high-traffic areas with good visibility and access to transportation. These locations will be more attractive to potential tenants and will help you keep your property leased up over the long term.

What are the Mechanisms for Investing in Commercial Real Estate?

There are a few mechanisms for investing in commercial real estate:

1. Buying an existing property - This is the most common way to invest in commercial real estate. You can buy an existing property outright, or you can take out a loan to finance the purchase.

2. Developing a new property - If you have the capital, you can develop a new commercial property from scratch. This is a riskier investment than buying an existing property, but it can also be more profitable if done correctly.

3. Investing in a REIT - It is a real estate investment trust - a company that owns and operates income-producing real estate properties. You can invest in a REIT by buying shares of the company on the stock market.

Investment Timeline

As with any real estate investment, there is no one-size-fits-all timeline for investing in commercial property. The time frame will vary depending on the type of investment, the market conditions, and your personal goals.

The below considerations can help you in deciding how long to hold onto a commercial real estate investment:

1. The initial investment process can take longer than anticipated.

2. Commercial tenants tend to have longer lease terms than residential tenants, so you may be locked into a property for several years.

3. Finding the right tenant and getting the property leased up can take time.

4. If you're hoping to sell the property down the road, it's important to factor in the current market conditions and potential future trends.

Conclusion:

To sum it up, as with anything important in life, you need to thoroughly research and understand what you’re getting into before jumping into the deep end. This is similarly true for investing in commercial real estate.

As with any investment, it's important to do your homework before investing in commercial real estate. That means understanding the market, being clear about your goals, and knowing your financial limitations.

However, if you do your research and enter the market with a clear head, investing in commercial real estate can be an ideal way to create passive income, build equity, and diversify your portfolio. Just make sure you're prepared for the risks involved.

For genuine guidance on investing in commercial real estate, reach out to the diligent Jay Thomas Realtor.

Hello! I'm Jay Thomas, A REALTOR in Houston, Texas. Chances are you and I share a similar passion, Real Estate! I also have a passion for building businesses, working out, inspiring others, technology, sports, and people. Connect with me on Facebook and Instagram!

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