–<\/span><\/p>\nWhat Is Commercial Real Estate?<\/h2>\n
Commercial real estate is a property used solely for business purposes. In other words, commercial properties are workspaces rather than living spaces. In most cases, commercial properties are purchased by investors and leased to tenants who want to use the property to conduct business. As there are many types of businesses, commercial real estate is a fairly broad term. Examples of commercial real estate properties include everything from shopping malls and warehouses to assembly plants, restaurants, hotels, and office buildings. Most investors make money from commercial real estate in one of two ways: leasing it out to commercial tenants or holding onto it, letting it appreciate, and reselling it. Commercial real estate is often divided into four classes distinguished by function. They are office space, industrial use, multi-family rental, and retail. From there, each category can be further broken down. For example, retail real estate may be categorized into hotels\/resorts, restaurants, shopping centres\/strip malls, and healthcare facilities.<\/p>\n
–<\/span><\/p>\nHow Investors Make Money in Commercial Real Estate<\/h2>\n
Investing in commercial real estate can be incredibly lucrative, which makes it an attractive option for investors. Before purchasing a piece of commercial property, it\u2019s important to understand the ways that investors make money from these properties. The most common method is by buying a property, letting it appreciate, and selling it at a higher price. However, depending on how involved you want to be, investors can also make money by renting it out to tenants and collecting rent. We break down the difference between direct and indirect commercial real estate investing below.<\/p>\n
–<\/span><\/p>\nDirect Investment<\/b><\/h3>\n
A direct investment in commercial real estate is one where the investor becomes the landlord. This form of investing is best suited to people who have extensive knowledge of the industry or have the money to hire a property management team to handle the property for them.<\/p>\n
–<\/span><\/p>\nIndirect Investment<\/b><\/h3>\n
An indirect investment in commercial real estate, also known as a passive investment, is when an investor indirectly invests in the market through a real estate investment trust (REIT) or an exchange-traded fund (ETF) that is centred on commercial property-related stocks. Another type of indirect investment is investing in stocks of companies that cater to the commercial real estate market, such as REALTORS\u00ae or banks.<\/p>\n
–<\/span><\/p>\nTypes of Commercial Real Estate Investments<\/h2>\n
There are many types of commercial real estate investments. Understanding each is key to determining which one is right for you. From multi-family properties to offices and industrial spaces, the most common types of commercial properties are below.<\/p>\n
\u00a0–<\/span><\/p>\nMulti-Family<\/b><\/h3>\n
Multi-family properties are a cross between residential and commercial real estate. While they primarily serve as residences, the investment opportunity is the main purpose behind the property type. Multi-family properties can be anything from low- and mid-rise apartment complexes to duplexes and multi-hundred condo towers.<\/p>\n
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\u201cMost investors make money from commercial real estate in one of two ways: leasing it out to commercial tenants or holding onto it, letting it appreciate, and reselling it.\u201d<\/h2>\n
[\/et_pb_text][\/et_pb_column][\/et_pb_row][\/et_pb_section][et_pb_section fb_built=”1″ _builder_version=”4.18.0″ _module_preset=”default” custom_padding=”||24px||false|false” global_colors_info=”{}” da_is_popup=”off” da_exit_intent=”off” da_has_close=”on” da_alt_close=”off” da_dark_close=”off” da_not_modal=”on” da_is_singular=”off” da_with_loader=”off” da_has_shadow=”on” da_disable_devices=”off|off|off”][et_pb_row _builder_version=”4.18.0″ _module_preset=”default” custom_padding=”||43px|||” global_colors_info=”{}”][et_pb_column type=”4_4″ _builder_version=”4.18.0″ _module_preset=”default” global_colors_info=”{}”][et_pb_text _builder_version=”4.18.0″ _module_preset=”default” text_font_size=”21px” text_line_height=”1.6em” header_2_font=”||||||||” header_2_font_size=”36px” header_2_line_height=”1.3em” header_3_font_size=”1.25rem” header_3_line_height=”1.88rem” header_4_font=”|700|||||||” header_4_font_size=”1.25rem” header_4_line_height=”1.88rem” global_colors_info=”{}”]<\/p>\n
Office<\/b><\/h3>\n
Office buildings are another popular type of commercial real estate. Office spaces are typically divided into three classes (Class A, Class B, and Class C) based on the property\u2019s location and the market. Class A buildings are considered the best in terms of location and construction, while Class B properties are a step below (they might have high-quality construction but are located in a poorer location). Class C properties are those that are lacking in both construction and location. They might be dilapidated and in a less desirable neighbourhood.<\/p>\n
\u00a0–<\/span><\/p>\nRetail<\/b><\/h3>\n
Retail spaces are those in which businesses sell goods to the public. Some of the most common examples of retail spaces are shopping centres and strip malls. Strip malls tend to contain smaller retail properties and may not have anchor tenants, like a big-box, department, or grocery store (for example, Walmart, Loblaws, or Home Depot). Strip malls may also contain a mix of retail stores, such as clothing stores, restaurants, dry cleaners, nail salons, and more. Conversely, shopping centres are usually larger (between 150,000 and 300,000 square feet in size), feature anchor stores, and may not have as wide an array of retail spaces.\u00a0<\/p>\n
\u00a0–<\/span><\/p>\nIndustrial<\/b><\/h3>\n
\n
Industrial properties within commercial real estate can vary considerably, depending on their specific uses. Industrial real estate may include everything from heavy manufacturing and light assembly to flex and bulk warehouses. The size and uses of each space may vary.\u00a0Industrial properties can also vary quite a bit in size, depending on their specific uses. For example, while a heavy manufacturing facility may contain customized heavy machinery for manufacturing purposes, a light assembly facility could be used as an office space, for storage, or for product assembly. Meanwhile, a warehouse can be used to store a wide variety of goods.<\/p>\n
–<\/span><\/p>\nHotels<\/b><\/h3>\n
Hotels are another type of commercial real estate investment. Hotels can be broken down into three categories: full-service hotels, limited-service hotels, and extended-stay hotels. Full-service hotels are usually in a downtown core or tourist areas (think Marriott or Four Seasons). Limited-service hotels are typically smaller, boutique properties that don\u2019t provide as many amenities as full-service hotels, such as spas, room service, or on-site restaurants. Finally, extended-stay hotels are those intended for long-term stays. Therefore, they typically have larger rooms with kitchens and are aimed at guests staying for a minimum of one week.<\/p>\n
\u00a0–<\/span><\/p>\nMixed-Use<\/b><\/h3>\n
Mixed-use commercial real estate is a property that combines two or more of the property types listed above. One of the most common examples of mixed-use real estate is one that is a retail space on one floor, such as a restaurant, and an office or residence on the floors above it. You often see this in major cities. Most often, mixed-use properties feature some combination of office, retail, and residential\/multi-family real estate.\u00a0<\/p>\n
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Land<\/b><\/h3>\n
Another commercial real estate investment, though it may not be the first one that comes to mind, is land. Purchasing land for commercial purposes can be a viable form of commercial real estate investing. The most common types of land are raw land (completely undeveloped) and vacant land (that has been developed but is now vacant). Another type of land is brownfield land, which is a piece of land that was previously used for industrial or commercial purposes and is now available for reuse. While it still has the potential for redevelopment, brownfield land usually features environmental impairments or is suspected of environmental contamination.\u00a0<\/p>\n
\u00a0–<\/span><\/p>\nSpecial Purpose<\/b><\/h3>\n
One final type of commercial real estate investment is special purpose properties. It is considered to be a miscellaneous category of commercial real estate and consists of extremely niche real estate projects, such as zoos, stadiums, bowling alleys, theme parks, and theatres.\u00a0<\/p>\n
\u00a0–<\/span><\/p>\nThe Pros and Cons of Investing in Commercial Real Estate<\/h2>\n
Armed with a greater understanding of what commercial real estate investing is and what types of commercial properties are available, let\u2019s move on to the pros and cons of commercial real estate investments.<\/p>\n
\u00a0–<\/span><\/p>\nThe Pros<\/b><\/h3>\n
One of the main pros associated with commercial real estate investing is income potential. Commercial properties tend to have a significant annual return that is higher than residential properties. Further, relationships with commercial tenants are typically easier to navigate than relationships with residential tenants. Business owners take pride in their businesses and are more likely to interact with the property owner in a professional and courteous manner. Further, since the appearance of the property reflects their business, commercial tenants (especially retail tenants) have a vested interest in maintaining their space. Plus, most businesses have limited hours of operation, which means you are less likely to get an emergency call in the middle of the night or outside traditional business hours. Another pro that comes with investing in commercial real estate is the flexibility of lease terms. There are fewer laws governing commercial real estate than there are surrounding residential real estate, which means you will have more power to negotiate advantageous lease terms.\u00a0<\/p>\n
\u00a0–<\/span><\/p>\nThe Cons<\/b><\/h3>\n
Meanwhile, one of the drawbacks of owning a commercial property is the time commitment. If you own a commercial building with multiple tenants, managing it can be extremely time-consuming. With multiple tenants comes multiple leases, more maintenance issues, and increased public safety concerns. In this vein, depending on the number of tenants in your commercial building, professional help may no longer be an option but a requirement. While hiring a property management company to handle the day-to-day operation of the commercial property offers many benefits, it can also be costly, eating into your profit margin. Another con of commercial real estate is the upfront cost. Commercial real estate comes with a bigger initial investment than residential real estate, so you must have more capital to even consider investing in a commercial property.\u00a0<\/p>\n
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