If you’ve been looking for a new way to invest this year, you may want to join the thousands of people investing in commercial real estate properties. Commercial real estate offers many benefits to investors, providing them with consistent returns on their investment and a source of passive income.
Today, we will share our top tips for beginning your investing journey with commercial real estate.
What is Commercial Real Estate?
Commercial real estate is a term used to describe many buildings, including offices, stores, and apartments. When individuals invest in commercial real estate, they can earn money by renting the property and value appreciation.
While commercial real estate can usually require more capital and time to make the initial investment and then manage the property, it’s an excellent option for anyone with the means to make this type of investment.
There’s plenty of support today for anyone investing in this area, and you can seek assistance from commercial brokerage firms and commercial realtors during the process.
Types of Commercial Real Estate You Should Target for Investment
When looking at the types of commercial real estate properties available to you, the options can be quite overwhelming. These are some of the most popular options on the market today:
Offices come in all shapes and sizes, ranging from small office blocks to huge skyscrapers.
The lease term for this property type is usually much longer than with residential properties, starting at five years and working up to ten years.
Industrial Real Estate
Industrial real estate is a term used to describe any building where manufacturing, assembly, or development occurs.
Warehouses, manufacturing plants, and factories all fall under this category, and once again, the lease agreement will last around five years.
Apartments and Housing Units
Multifamily real estate is a term used to describe four or more units. These units could vary from small apartments to a whole community of townhouses.
The lease on this property type is much shorter than the other options listed and will usually be between six and twelve months.
When looking at retail real estate properties, you’ll notice a considerable variation in your options. These can vary from a single retail unit to a complete shopping mall.
While some short-term lease options are available, tenants generally sign a multi-year contract of around five years.
Special Purpose Properties
When talking with property brokers, you’ll also find some unique options.
These often include self-storage buildings, schools, car washes, and hotels.
How to Get Started On Your Commercial Real Estate Journey
Due diligence is the key to success when investing in commercial real estate properties. Regardless of what type of property you are looking to invest in via commercial realtors, you’ll want to take the time and effort to research everything you need to know before beginning your journey.
There is a lot for first-time investors to consider, as this market is very different from the residential market. First, you will want to appreciate that commercial real estate is valued differently than residential properties.
When working with property brokers, the amount of usable square footage should be your number one consideration. Location is another critical factor. As with any investment, it can help you establish the type of tenant that will be the most appropriate.
After you’ve started to understand the basics of commercial real estate, you need to start looking at comparables in the area to invest. Comparables, or comps for short, describe the style, size, and location of properties recently sold similar to what you are viewing.
When choosing your commercial real estate investment, compare properties with similar square footage for the most accurate comparison.
Calculating the Potential for Your Commercial Real Estate Investment
There are specific calculations you will want to apply to any property to help you estimate the potential earnings for your investment:
- Net Operating Income – The net operating income (NOI) discusses the annual revenue your real estate investment offers you. To calculate this, add up the rent you will receive in a year. Then deduct the fees to maintain the property.
- Capitalization rate – The capitalization rate is valuing real estate properties. It measures the natural rate of return within a year, helping you compare properties with commercial realtors. You will usually find this rate expressed as a percentage.
- Debt service – This is the amount that a loan requires you to pay. Various factors are taken into account to calculate this. You’ll want to look for a property with a lower amount of debt for a less risky investment.
- Internal rate of return – The IRR calculates the profitability of investment during its life. The IRR usually shows the average annual return percentage. It helps to project the rate of growth needed for the property to reach its future projected value.
Commercial Real Estate Loans
Before working with commercial realtors, you may want to consider your financing options. There is a vast selection of loan options available. It is ultimately up to you to choose the one that works best for your needs.
Popular options include a Small Business Administration loan, Commercial Bridge loan, Certified Development Company loan, and conventional loans. Take the time to consider your options and the loan-to-value ratio to find the most favorable solution for your investment.
Commercial real estate properties offer an excellent investment opportunity for individuals. With such a wide variety of options, you can start somewhere comfortable and build.
We highly encourage you to do proper due diligence. Don’t rush any aspect of the process. This research will improve your chances of succeeding and profiting from your investment in the upcoming years.
About NAI Glickman Kovago & Jacobs
As the leading commercial realtors in Worcester, MA, NAI Glickman Kovago & Jacobs focuses on commercial property listings. We have an award-winning record in the restaurant, retail, office, industrial, multifamily, and medical real estate management. We can also assist with land acquisition and development as a commercial brokerage. Our deep local knowledge comes from decades of business partnerships with key community vendors. Whether you’re buying, selling, or leasing, we can find the right property to fit your needs.
Contact us today if you need help finding commercial property for sale, brokerage, commercial construction, or property management services in Worcester, MA. You can also follow us on Facebook, Instagram, and LinkedIn for more updates about our rental manager services in Worcester, MA.