Investing in commercial real estate is one of the best ways to build wealth. Unlike residential real estate, which is often a speculative investment, commercial real estate is much more stable and provides several tax benefits that can help you maximize your profits.
The Recovery of Commercial Real Estate
The pandemic dealt a heavy blow to the commercial real estate industry. Office buildings, hotels, and retail stores have all suffered. However, as the economic recovery trend continues, commercial real estate investors are optimistic as the industry adapts to changes.
Of particular note, the pandemic has spurred demand for more flexible office spaces that accommodate remote work and industrial warehouses.
Vacancy rates have started to decline, and rents are beginning to stabilize. Overall, the industry has shown a remarkable ability to adapt to change, and with the flurry of investment opportunities surfacing, smart investors are paying attention. Here are a few things you need to know before getting started in commercial real estate:
Commercial Real Estate Investment Sectors
Commercial real estate is a property designed to house businesses, which are described in five primary sectors:
1. Office
Office space is classified into three categories: Class A (new or recently renovated and in a good location), Class B (may need some repairs but is well-maintained and managed), and Class C (often used for redevelopment opportunities).
2. Retail
Retail real estate properties can include buildings, banks, and strip malls. Often located in urban areas, these properties can be as large as 350,000 square fee
3. Industrial
Typically warehouses and manufacturing sites, industrial real estate offers spaces with height specifications, freight, and docking accessibility.
4. Multifamily
Multifamily properties are an attractive investment for many reasons. They tend to be less expensive and more manageable than commercial properties, and they offer the potential for high returns.
5. Special Purpose and Mixed Use
Special purpose properties are those that are explicitly designed for a specific use. Car washes, self-storage facilities, hotels, and amusement parks are examples of special purposes.
A mixed-use development (MUD) is an area designated for various uses, which encourages pedestrian traffic and discourages traffic congestion and sprawl. The commercial real estate sector has seen a surge in demand for MUDs, as they offer a unique investment opportunity.
Benefits Of Commercial Real Estate Investing
The key to commercial real estate investing success is finding the right property and managing it effectively. Investing in commercial real estate can provide a steady stream of income and appreciation over time. It can also offer significant tax advantages and the potential for a high return on investment. Some of the reasons commercial real estate investing is attractive for many people are:
Higher Income / Lower Fluctuation
The potential for higher returns is not the only benefit of investing in commercial real estate. Commercial properties are also easier to finance and offer more opportunities for creative financing. In addition, commercial real estate is less likely to be impacted by fluctuations in the housing market.
Cash Flow
Commercial real estate is a good investment because it has a more consistent income stream, and the tenant pays for many of the owner’s benefits.
Lower Market Saturation
Because commercial investing is perceived as complex, there is less competition for commercial real estate.
Longer Leases
Commercial real estate leases are typically longer than residential ones, offering investors attractive returns and significant monthly cash flow.
Professional Network Development
Commercial real estate allows investors to interact with their tenants on a more professional level.
Limited Operational Hours
Commercial real estate owners typically have set business hours, while residential real estate requires someone to be on call 24/7.
Mitigating Risk
Mitigated risk exposure is the greatest thing a real estate entrepreneur can do for their success. Mitigating risks will increase the likelihood of your business’s survival and make it more likely that you’ll be able to achieve your financial goals. Here are some of the most common, avoidable mistakes investors should be aware of:
Improper Valuations
Commercial real estate investors need to be aware of the uniqueness of each property and account for variances to make sound investments.
Financial Ignorance
Investors must know the differences between commercial and residential real estate investing, especially regarding loan-to-value and debt service coverage ratios.
Neglecting Due Diligence
Doing your research before making decisions in today’s market is essential. Investors should learn about a property before buying it to avoid getting into deals they’re not prepared for.
Not Working With a Team
Many investors want to save money by doing everything themselves, but this is often not the best strategy. While it may appear to save money on the surface, working alone is unequivocally worse than working with a team.
Types Of Commercial Real Estate Loans
There are various commercial investment loan types, each with unique eligibility requirements. Investors are looking for different things when they choose a loan. Some may want lower interest rates over a longer term, while others need short-term funds to bridge the gap between financial goals and needs.
AVANA provides customized commercial real estate and renewable energy loans to small and middle market businesses with unique solutions for growth and expansion.
Construction Loans
Loans for property expansion, renovation, or construction for owner-occupied properties.
SBA Loans
For the acquisition, renovation, build, or purchase of commercial properties and equipment.
Bridge Loans
Unique loans to purchase distressed properties, take advantage of repositioning opportunities, or create time-sensitive solutions for entrepreneurs.
Loans Tailored for Your Business
Commercial real estate investing can initially seem daunting, but it is essential to remember that the core skills required are the same as those needed for residential property investing.
The key is to do your due diligence, have a solid business plan that considers financing options, and build a strong network. As with any investing, some element of risk is involved. However, commercial real estate can be a profitable endeavor by taking the time to understand the market and employing strategies to mitigate risk, careful planning, and a willingness to take calculated risks.
Company Insights
Since 2002, AVANA has empowered businesses to grow and thrive through specialized lending and financing solutions. AVANA is comprised of a dedicated and diverse team of finance professionals with a unified mission to create jobs, stimulate economies and contribute to clean energy. Focused on supporting and providing impactful, socially-driven investment opportunities that preserve wealth and create growth.
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