Thinking about investing in commercial real estate, but not sure where to start? In this blog, we’ll go over the basics about commercial real estate investing, including how it works, why you might consider investing, how to get started, and how CERRON Commercial Properties and APPRO Development can help.

Let’s dig in!

What Is Commercial Real Estate Investing?

Commercial real estate (CRE) investing involves purchasing properties intended and zoned for business use, with the goal of earning a profit through rental income and/or property appreciation. There are several categories of CRE properties you can invest in, including:

• Office spaces, ranging from small office buildings to large corporate headquarters
• Retail, including individual stores and shopping centers
• Industrial (manufacturing, warehousing, distribution), ranging from small warehouses to large industrial parks
• Multi-family residential buildings with five or more units leased to individuals
• Hospitality, including hotels and motels
• Special purpose buildings, such as schools, churches, or theaters

The properties you invest in can be leased out to tenants or owner-occupied. Your investment can be done actively (where you have a hand in every aspect of the deal) or more passively through a professional real estate firm.

Why Invest in Commercial Real Estate?

Commercial real estate can be a lucrative investment with a range of benefits, not the least of which is the potential for a steady stream of passive income. Some of the reasons people choose to invest in CRE include:

Steady Cash Flow

Investing in CRE has the potential to bring significantly higher returns and greater passive income than residential real estate. With multiple tenants in a single building, rents alone can generate substantial cash flow.

Capital Appreciation

Commercial property, like any property investment, has the potential to increase in value as the area surrounding it develops. Keeping up on maintenance and renovations helps further ensure high rates of return.

Less Competition

Commercial assets typically have fewer buyers vying for them than residential properties do. This reduced competition can make it easier to acquire commercial property at reasonable rates. Commercial investors have more opportunities to negotiate favorable deals than they would in the residential sector.

Long-Term Leases

Compared to a residential lease, commercial leases typically have longer terms, often ranging anywhere from three to ten years (or more, in some instances). This means lower tenant turnover and greater stability and predictability. 

Tax Benefits

Commercial real estate investing offers tax benefits as well. For example, commercial property owners are able to depreciate a property’s value in return for a deduction on their income taxes (non-residential properties allow for 39 years' worth of depreciation).

Commercial property owners can also take advantage of the 1031 exchange, which allows you to defer capital gains tax on the sale of your investment property when you reinvest the proceeds into a similar investment property.

How To Get Started With CRE Investing

So now that you understand the benefits of investing in CRE, let’s go over the details you need to know to start investing. Getting started with commercial real estate investing requires careful planning and strategic decision-making if you hope to get the most out of your investment.

1. Do Some Research

Start by researching the CRE industry. Learn about the different types of commercial properties you can invest in, get to know industry terminology, and start tracking market trends. Read books, attend seminars, and routinely consume real estate industry news.

2. Define Your Investment Goals

As with any new endeavor, it’s best to set goals for your CRE investment before you buy your first property. To start with, you should determine whether you’ll utilize your properties for long-term appreciation and consistent rental income vs gathering short-term gains through refurbishing and reselling. 

Then, set specific, measurable goals (such as aiming for a particular annual ROI), and determine which property types and geographical areas will best help you reach those goals. 

3. Understand Your Financing Options

When you buy commercial real estate, you have different financing options to choose from than when you buy a home. Some options include commercial mortgages, SBA loans, partnerships, or investment groups. Before taking on any type of financing, make sure you understand the terms and conditions, including interest rates and loan-to-value ratios. 

4. Build a Team

When you buy a commercial property, don’t go it alone—especially when buying your first property! Gather a team of experts to lean on, including a qualified real estate broker (CERRON Commercial Properties), an attorney, an accountant, and a real estate developer (APPRO Development). The support of this team of pros will help ensure your investment gets off to a great start.

5. Evaluate Markets and Properties

Finally, utilize the team of contacts you’ve gathered to find and evaluate potential investment properties. As you consider each property, do your due diligence to determine if the investment is a good fit for your goals. This involves looking at factors like:

• Location
• Condition
• Property valuation
• Financial metrics (net operating income, capitalization rate, cash-on-cash return, etc.)
• Market analysis
• Tenant base
• Demand

Learn more about what to look for in an investment property in this blog. 

Understanding ROI and Payback Period

Understanding how to evaluate the ROI and payback period of your potential investment property can give you important insight into how it might perform.

To calculate a property’s ROI, you’ll first need to calculate the building’s net operating income (NOI). The NOI is the income the property generates once you subtract regular operating expenses like taxes, insurance, and maintenance costs (NOI=gross income – operating expenses). 

Then, to calculate your ROI, simply divide the NOI by the purchase price, then multiply that number by 100% (ROI=NOI/purchase price x 100%). For example, if the property’s purchase price is $1 million, and its NOI is $100,000, the ROI would be 10%. Generally speaking, an annual ROI in the range of 8-12% is considered a good ROI.

The payback period of a commercial property (the amount of time it takes to break even on your investment) can range from 5-10 years. However, both the payback period and the property’s ROI can be influenced by many factors, including property type, market conditions, location, rent rates, occupancy, loan terms, interest rates, and maintenance costs.

To maximize your investment property’s ROI, make sure to:

• Do your due diligence before purchasing
• Make high-value renovations to improve the property’s value and rent potential
• Take advantage of tax incentives available at federal, state, and local levels
• Stick with it for the long haul—real estate markets can fluctuate, but if you hold onto a property for the long term, you’re more likely to see appreciation.

How CERRON Commercial Properties and APPRO Development and Can Help With Your CRE Investment Goals

Getting started with CRE investing can feel overwhelming. Truly, choosing the right commercial property to invest in can be a complex endeavor for even the most seasoned real estate investor. That’s why it’s so important to have a team of experts by your side to help you through the process—including a real estate broker like CERRON Commercial Properties and a developer like APPRO Development.

The CERRON Commercial Properties and APPRO Development team can help you with:

• Site selection
• Land acquisition
• Feasibility studies
• ROI modeling
• Design and build services

…as well as robust support from your initial investment idea through to occupancy. 

If you’re ready to get started with commercial real estate investing, our team is ready to help! Contact us today to learn how we can come alongside you to help you find, vet, and procure your first commercial investment property.