Best Types of Commercial Real Estate Properties Investors Should Know

David Cohn
|
Jun 5, 2021

The reality is that glamorous and iconic commercial real estate properties are owned mainly by large institutional investors and investment firms—such as private equity funds and real estate investment trusts.

It can be challenging to compete against these folks because they have access to so much more money and require a relatively small return on each investment dollar.

As an individual investor, you have less capital but need more significant returns. So what types of commercial properties are best suited for you?

Let’s discuss what’s there to like—and dislike—about different types of commercial properties so you can make a decision.

1. Multifamily

Apartment buildings with five units or more are categorized as commercial real estate.

Multifamily properties are desirable to individual commercial investors because demand is always high.

After all, everyone needs somewhere to live. It is also one of the most accessible commercial property assets to start. The great thing about them is that they are not as risky as other asset classes.

High vacancies are rare, and when tenants move out, all you need to do is install new carpeting and paint the walls to re-rent the units. Well-managed apartments can generate a stable cash flow and make great tax shelters.

Handle the income well, and you can build equity—and even pay off the commercial multifamily loans—relatively quickly. You can also force the appreciation of your apartment building by reducing expenses or increasing rents.

One disadvantage of apartment investing is the threat that neighboring developers might build new apartments. These new builds may detract from your older building’s desirability to potential tenants.

2. Office

Office properties range from single buildings with just one tenant to skyscrapers with dozens of companies renting multiple floors. Many commercial property investors consider office spaces an inflation hedge because rent increases are built into leases.

What’s more, tenants are typically responsible for net rent, taxes, insurance, and maintenance costs. Office rents are high when the economy is doing well. Investors can also build serious wealth by holding onto their office buildings for a long time.

The disadvantage is that when tenants leave, the vacant space usually needs significant renovations to attract and suit new renters. Office properties also depend a lot on the economy; if the economy goes south, so does demand.

Experts recommend that newer commercial property investors start small. It’s also essential to choose an office building that has multiple tenants who have long-term leases.

3. Industrial

Industrial properties are used to manufacture, produce, or develop products. They can also refer to logistics properties that support the storage and movement of goods.

There’s speculation that by 2025, the U.S. will probably need over one billion square feet of added warehouse space to support e-commerce demand.

This translates to many expansion and development opportunities for commercial real estate investors interested in this niche.

The industrial, commercial property space is highly competitive right now because of the boom in online shopping. The good news is that capital requirements are typically low, and these types of commercial real estate assets are a good investment in the long run.

They are beautiful to investors because these types of properties are vital in moving the economy. What’s more, these properties generate stable cash flows because industrial tenants typically sign long-term leases lasting 3 to 10 years.

Some leases can even be up to 25 years.

Another good thing about industrial properties usually doesn’t need as much upkeep. The tenant is responsible for maintenance if the lease is a triple net. As the owner, you probably won’t have to renovate the property as often because tenant turnover is lower.

4. Retail

There’s a wide range of retail properties, from glitzy promenades to low-end retail spaces for dollar stores. Strip malls also fall into this category, though their demand seems to be on a downward trend.

Many investors still put money in shopping centers because they are regarded as stable investments, with most tenants signing long leases lasting from 5 to 20 years.

But retail is tricky; it tends to be capital intensive, so that you will need access to a lot of cash. The departure of a tenant can also dramatically impact the property’s income.

5. Self-storage

These are commercial properties with individual rooms that are spaces where clients can store their belongings. They come in all sizes, with bigger ones being able to store oversized items such as RVs and boats.

Self-storage is very similar to apartments, except that you don’t have to deal with tenants and evictions or toilet repairs (less maintenance).

Many commercial real estate experts say that storage is economy-proof as long as you choose a good location. The downside is that it can take a long time for all the storage units to be occupied.

6. Mobile home parks

In this type of real estate investing, you can choose to either own just the park or the park plus the mobile homes on it. The first arrangement is often better. Owning just the ‘dirt’ means less maintenance—and therefore, fewer expenses.

Mobile home parks tend to produce a stable cash flow because there’s a great demand for affordable housing.

There aren’t many new parks being built because of strict regulations, so competition is low. Tenants also usually stay for many years.

The most significant disadvantage is that mobile home park financing can be challenging to get. You also need to buy a big enough park to warrant a property manager if you don’t want the headache of managing it yourself.

General advice

No matter what commercial property type you ultimately choose to invest in, it’s essential to look at the demand for that kind of real estate. Mobile home parks, student housing, apartment complexes, storage facilities, and office buildings tend to attract a steady stream of tenants no matter the state of the economy.

The exception to this rule is an industrial property with a triple net lease. Even if you only have one tenant, you can create a stable income when signing a long-term lease and agree to shoulder maintenance, building insurance, and real estate taxes.

It’s also important to look at the location of the property itself. You want your property to be in a high-traffic area to attract tenants who are more likely to be happy to renew their leases.

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