How to Make Smart Commercial Real Estate Investments

How to Make Smart Commercial Real Estate Investments
March 27, 2021

Buying commercial properties is often the next step in the investment ladder for those who have experience in residential real estate investing and want to move up to bigger gains. Commercial properties typically earn more because of economies of scale.

But what exactly qualifies as commercial real estate or CRE?

CRE refers to any land or structure/building that is utilized for business purposes and residential complexes that are large enough to be classified as commercial. Some examples of CRE include:

  • Retail/shopping centers
  • Office buildings/complexes
  • Multi-family buildings
  • Warehouses
  • Mobile home parks
  • Industrial complexes
  • Medical offices
  • Hotels, motels, and resorts
  • Self-storage facilities

Can you invest in CRE even with small capital? 

Yes! If you’re new to real estate investing and have a fairly small amount of capital, you might think that commercial properties are too expensive, too risky, and too time-consuming for your taste. And that’s true. Outright ownership of an apartment complex or an office building requires a serious amount of initial capital (about 30% of that total purchase price as a down payment). It also demands expert-level know-how of commercial real estate industry trends—not to mention hands-on involvement. It’s not cheap and not passive. It also involves a lot of risks.

Luckily, several options are available for those who want to put money into commercial real estate without overextending their finances.

1. Join commercial real estate crowdfunding platforms

If you’re looking to buy a commercial real estate asset that is not confident about your know-how in this industry, this is a good start. Joining a CRE crowdfunding platform allows you to invest in commercial properties with less work—and a lot less risk.

Different platforms require different minimum investments, usually starting at $1,000, which allows you to buy a “share” of a commercial real estate loan or project.

Even though crowdfunding has been around for more than a decade, it wasn’t until 2012 that it really became popular because of the JOBS (Jumpstart Our Business Startups) Act. Now more than ever, there are many commercial crowdfunding platforms to choose from, offering many interesting commercial deals. Note that you have to be an accredited investor to participate.

Don’t know where to start? Here’s a list of some of the biggest and most popular platforms you can check out. Many of them offer both residential and commercial opportunities:

  • Fundraise – Minimum investment of $500
  • Crowdstreet – Minimum investment of $25,000
  • RealtyMogul – Minimum investment of $5,000

It’s important to do your due diligence before using any crowdfunding platform. They should be easy, though, that is most of the documents you need are available online.

2. Invest in REITs (Real Estate Investment Trusts)

REITs are among the most practical investment vehicles for smaller investors who don’t want to bother with the stress and responsibility of finding, purchasing, and managing commercial properties themselves. The law requires REITs to pay their investors 90% of their earnings by way of dividends.

REITs are invested in all kinds of commercial real estate—from storage facilities to retail spaces, all the way to office buildings, industrial spaces, apartments, assisted living facilities, and more.

You don’t need to be an accredited investor to buy REITs, so it’s a great way to diversify your portfolio to include commercial properties instantly. What’s great about them is they provide a reliable source of passive income. They’re also very liquid, making them appealing to investors who don’t want to tie up their funds.

To get the most from these investments, make sure that you are not slapped with hidden fees. Some REITs have shockingly high upfront sales fees (called loads)—much higher than those you might pay when investing in exchange-traded funds and mutual funds.

How do you start purchasing shares of publicly-traded REITs? Talk to a broker. REITs can be purchased as debt securities, preferred stock, or common stock. You will likewise find REITs in exchange-traded funds.

It’s also possible to invest in REIT shares using online platforms such as the following:

  • Medalist Diversified REIT by CrowdStreet – Check this out if you’re interested in putting money in retail, industrial, hospitality, and multi-family real estate.
  • Streetwise – You might find some lucrative deals here that let you invest just a few thousand dollars.
  • eREITs by Fundraise – The minimum investment here is even lower—just $500.
  • NNN REIT by Rich Uncles – Get a chance to invest in commercial properties currently leased by different retail companies.
  • MogulREIT by Realty Mogul – The offers here that you get your toes into multi-family, retail, industrial, office, medical, hospitality, and self-storage properties.

Why bother to invest in commercial real estate?

Commercial property investing offers unique benefits that are unavailable in residential property investing. These include the following:

Higher revenue 

In most cases, commercial properties bring a lot more money in terms of rent per square foot compared to residential spaces. And because commercial buildings usually have multiple spaces that all generate rental income in one roof, maintenance and repairs are spread across several leases and are often cheaper to do. This combination of lower maintenance costs and higher rental income makes CRE properties more profitable than residential property assets.

Diversification 

Think about it: If you own a 10-unit multi-family building and lose one or even two of your tenants, you’re only losing only one-tenth to one-fifth of your property’s income. But if you lose your single-family home tenant, you’ve lost 100% of that income.

Several cash flow streams 

Commercial leases provide relatively reliable inconsistent income streams. On top of that, CRE owners can also create many other income streams from the same property. Many of them make a lot of money from charging for parking spaces in their office buildings, for example. Some investors also put jeans or vending machines that office tenants in their guests can use. For multi-family apartment buildings, landlords often provide point-operated washers and dryers. There are so many creative ways to create additional cash flow streams from commercial properties.

In “triple net lease” agreements—the standard in several commercial real estate classes—tenants also shoulder real estate taxes, property insurance, and operating expenses aside from their monthly rent.

Less risk –

Commercial real estate can be less risky because the leases are longer compared to those in residential property. Commercial leases typically last for years—not just a few months. This creates a cash flow that is more predictable while lowering vacancy rates, thereby reducing risks for the investor.

Less competition –

If you’ve been investing in residential properties for many years, then you know how competitive the industry can get. You have probably been involved in multiple bidding wars for condos and single-family homes. These eventually add up and make the cost of doing business so much more expensive. There’s less competition in commercial real estate (depending on the area).

If you need help investing in commercial real estate, it’s best to talk to a CRE mortgage loan broker for some guidance.

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