Best Tips to Start Commercial Real Estate Investing in 2023
What Is Commercial Real Estate (CRE)?
Commercial real estate is income-producing property. It is leased to tenants to generate income as well as capital gains through appreciation. Commercial real estate includes several categories: retail, office space, hotels & resorts, strip malls, restaurants, multifamily apartments, and healthcare facilities.
Who is best suited for Investing in Commercial Real Estate?
There are multiple and substantiated reasons for investing in commercial real estate. The barriers are minimal and leave the door open for just about anyone, even those with a modest income, to place their savings in commercial property investment.
Professionals in the trades such as electricians, plumbers, carpenters, and contractors are investing in commercial real estate. Teachers, professors, doctors, and lawyers also invest passively in commercial real estate. The laws governing real estate syndication open the doors of opportunity for just about anyone to develop a source of passive income from commercial real estate investing.
People From All Different Backgrounds Invest In Commercial Real Estate
On my podcast, Real Estate Investing Abundance, I regularly speak with people from many different backgrounds. They all successfully pursue lucrative investment careers in commercial real estate investing. Some are college educated; others had no interest in going to college. Some commercial real estate investors got started in their twenties, and others didn’t get into investing until much later in life.
There is no one type of person best suited for investing in commercial real estate. Not only is there not a single type of person, but there is also no single prescribed method that must be followed. Each investor can select the investment direction that most appropriately meets their investment needs.
Commercial real estate investing is ideal for busy professionals looking for the best returns possible on a passive investment.
Excellent for Retirement Accounts
Commercial real estate investing is a non-liquid investment. It is not suitable for the person who may need access to their investment funds. Most commercial real estate investments require a minimum of three years. The holding period is often expected to be five or more years.
The non-liquid aspect makes commercial real estate ideal for retirement investing. The lack of ability to access funds is not unusual for retirement accounts. Many retirement plans such as IRAs and 401Ks lock up a person’s investment funds for decades. In fact, these are excellent sources of funding for commercial real estate investing. See the posts, 10 Crucial Tips Before Investing 401Kin Real Estate and Is Buying Real Estate Using Self-Directed IRA a Good Investment?
How to get into Commercial Real Estate Investing?
There are two common misconceptions about commercial real estate investing.
- Many people are under the impression that one must be very wealthy to invest in commercial real estate.
- Secondly, the common thinking is that commercial real estate investing is complex and complicated.
Fortunately, both are false perceptions. Most people are familiar with real estate investing through their own personal experiences of purchasing and owning their own single-family home. For a person to buy a home, the vast majority must acquire a mortgage. For the prospective buyer to get a mortgage, they must first qualify. The qualification process is complicated and takes a minimum of 45 days to complete.
Most people who have never invested in commercial real estate assume that it must also be much more complicated. This is a logical assumption. Fortunately, it is a mistaken assumption.
Passive investing in commercial real estate as opposed to purchasing your personal single-family home is relatively simple.
Here are 12 ways to get started in commercial real estate investing. For a more thorough explanation, refer to the post, 12 Best Real Estate Investment Strategies for 2023.
12 Ways to Invest in Commercial Real Estate
a Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool the capital of numerous investors. The pooling of funds makes it possible for individual investors to earn dividends from real estate investments without buying, managing, or finance any properties themselves.
This is the process of raising a pool of funds through an online crowdfunding platform. These function similar to “Go Fund Me.”
These are similar to ETFs. These funds are generally run by economists who are seasoned in the investment world. For this reason, they are considered one of the lower-risk investment vehicles for investors.
The fix-and-flip real estate investment strategy is the most widely known due to rehab’s popularity and rehab reality shows on HGTV. For those who already have construction skills or those willing to learn them, this is one way to invest in real estate.
If you enjoy working with people, marketing, looking for under-market deals, and negotiating the best price in terms with prospective sellers, the wholesaling real estate investment strategy offers low investment risk opportunities to build wealth through real estate business.
Is the acronym for Buy – Rehab – Rent – Refinance – Repeat. The house hacker investor can quickly move from hacking one home to multiple homes using the BRRRR method. Start with your personal residence. Get your private residence rented and then purchase a second home and do the same. Now you have a system that you can replicate repeatedly, and the built-in rental strategy continues to grow passive income.
This real estate investment strategy is viewed as a “value-add” proposition. The goal of the purchase is to force appreciation in short to mid-term time frame. This strategy is most useful with commercial real estate such as multifamily, mobile home parks, self-storage, retail, and industrial. Generally, the property is income-producing. The goal is to increase the net income by improving operational efficiencies.
The long-term buy-and-hold strategy is a time-tested and proven strategy for building wealth for a prosperous legacy. The power of the buy and hold real estate investment strategy is real estate appreciation. Over the long haul, property value keeps pace with inflation and, in some markets, outpaces the inflation rate. For this reason, the buy-and-hold real estate investment strategy provides a lower risk investment than the stock market.
The trade-up real estate investment strategy helps investors prosper via the IRS 1031 Exchange tax code. A high cost to real estate investors is the capital gains tax that comes with selling investment properties. Capital gains taxes can take a sizable portion of profits on the sale of a property.
This is a well-known commodity in the world of real estate investing. The hard money lender is an individual or an organization that lends private money to another person or entity. The hard money loan is guaranteed with a promissory note. In the case of real estate, the hard money note is secured with a deed of trust. The deed of trust allows the hard money lender to take possession of the property via foreclosure in the event of delinquency or non-payment. These are the same documents and processes that institutional banks use when lending on mortgages.
This strategy entails selling and trading private promissory notes secured with mortgages or deeds of trusts. The promissory notes are originated by banks, seller financing, or hard money lenders. The idea behind selling a note at a discount is the time value of money. Money is more valuable now than in the future.
Investing in real estate syndications is one of my favorite passive real estate investment strategies. Investing in real estate syndications is not entirely as passive as investing in REITs, but the likelihood of a significantly improved ROI makes the additional effort more than worth the added effort.
For the passive investor, the best way to enter commercial real estate investing is through syndication.
Real estate syndications provide the least risky approach to investing in the real estate sector. The low risk comes from investing with seasoned professionals who know and understand real estate.
A passive investment in a real estate syndication will also produce some of the best returns on investment. Unlike the stock market, real estate investments are much more stable and predictable. Whether your investment goal is regular cash flow or growth, the syndicated offering can be ideal.
Kavitha Barratakke provides an excellent example that illustrates why knowledgeable investors prefer commercial over single-family home investing. Like many, Kavitha began her real estate investing career in single-family homes.
Her original plan was to build a double-digit portfolio of single-family rentals. After acquiring only a few she realized that this approach was not going to work. She was looking for passive income, not a second job.
Through self-education and networking, Kavitha learned of real estate syndication. She was pleased to discover the advantages are not only monetary. Commercial real estate investing was also less labor-intensive and much more suitable for her passive investing asperations.
Check out Kavitha’s interviews on Creek Side Chats and Real Estate Investing Abundance to learn more about her journey from single-family investing to fulfilled and successful commerical real estate investing.
To get the process going, you’ll first want to get educated. For your first step, check out the article, How to Build Wealth with Syndicated Multi-family Real Estate Investing. The article illustrates the entire process, from finding the syndicator to putting the money into the investment.
For more detail, an excellent starter book is The Hands-Off Investor: An insider’s guide to investing in passive real estate syndications by Brian Burke. The book is comprehensive while being very understandable. Brian shares his wealth of investment knowledge accumulated from over thirty years of real estate investing and controlling over half a billion in assets.
Another great avenue for self-education is to tune into podcasts. Real Estate Investing Abundance is broadcast three times each week and provides insights from the leading real estate investors. The beauty of podcasts comes from tuning in while doing other activities such as exercising or driving.
Is Commercial Real Estate Passive Income?
Unequivocally YES. Passive real estate investing can provide a lifetime stream of passive income. Many of my podcast guests have developed a passive stream of income that has allowed them to leave their jobs. Others have developed a passive stream of income sufficient to leave their jobs because of their passion for their chosen profession, but they continue in the work of their calling.
There are many avenues to develop passive income from commercial real estate investing. It can be a completely passive endeavor, or it can be a full-time occupation. Every investor needs to assess their own needs and desires to develop the investment plan that is most conducive for them.
For further information on passive investing in real estate, reference the post, How to Get Started with Passive Real Estate Investing.
Which is the most profitable form of commercial real estate investing for the small investor?
5 Commercial Real Estate Sectors
There are five primary commercial real estate sectors to select from.
Multifamily Apartments
these are typically two to three-story walk-ups from 30 to several hundred units. These apartments are generally found in the suburbs and offer surface parking. They come with different amenities such as a shared yard, dog walk, pool, recreation room, and clubhouse.
These are typically from 4 to 11 stories and house from 50 units to hundreds. Often the amenities include a parking garage and elevator service. Class A and B mid-rise will have amenities such as a box room, recreation center, and clubrooms.
These are typically found in the dense urban areas close to the central business districts in the largest metropolitans. Class A high-rise apartments are heavily amenity driven. Many have door and concierge services.
These apartments are designed for college students. They can be mid-rise or high-rise. Many are designed for shared common areas such as living and kitchen with private bedroom and bath.
As the name implies, these apartments are designed for the elderly and aging. These projects offer a much higher level of support for their tenants than other traditional house complexes. The services range from independent living arrangements to intense assessed living. Some offer transitional options. A resident may begin their residency living independently and move to more supportive environments as the aging process continues.
These are parks where manufactured homes are found. The residents may own the home and rent only the lot space. In other instances, the park owns the home and rents the home to the tenant.
Commercial mobile home parks can be as small as five units up to several hundred. Larger mobile home parks offer amenities similar to apartments, such as clubhouses and pools.
Mobile home parks are considered the most affordable housing units available in the commercial space.
Office
Investing in the office can be more capital intensive for the developer and provide some of the highest returns.
Office buildings in the central cities often house the most prominent companies such as large banks main offices of other international businesses. These buildings can be either mid or high-rise and generally provide parking garages.
These are often houses initially built for private residents, but as the commercial districts grew, they swallowed up the residential areas, and the homes were converted to an office.
These are often favorite places for attorneys and other professional service providers who what a less commercialized feel and appearance.
As the name implies, these offer office space specifically designed for the medical professions. These can be single rise to high rise buildings. They offer ample parking space and often provide a portico with an accessible entrance.
These spaces are built outside of the central business districts. They are often built-in campuses with several complexes within a prescribed area. The facilities may be single rise to high rise. If more than one story, they will require elevator service that meets accessibility requirements.
Industrial
There is a wide range of properties that fall under the category of industrial. This asset sector has grown considerably as online shopping has become more popular.
These properties are the most significant industrial spaces and can range in size up to 1,000,000 square feet of storage space or more. These are often intended for national or regional distribution centers and require access to shipping routes: aeronautic, maritime, rail, and highway.
These facilities are found in the most industrialized zones in the region. They can be found in rural and urban areas. They require accommodations for heavy machinery, chemicals, toxic waste dumping, and high quantities of power.
For these reasons, they are zoned away from residential areas.
This type of space is not used to manufacture base materials. These spaces are mainly used for assembly. Like heavy manufacturing, they require reasonable access to distribution via aeronautic, maritime, rail, and highway.
These facilities are just what they say they are. They provide warehouse-size refrigeration for the storage of perishable items.
These spaces are developer-intensive and are built to the specific needs of the tenant. Tenant leases are long-term, and retention is high.
Self-storage units can range from 4 feet by 4 feet to 24 feet by 24 feet. In some cases, self-storage facilities also provide storage for trailers, boats, or other types of vehicles.
Self-storage facilities are popular with investors because of low maintenance and minimal management. Lease terms are simple, and vacancy rates are easy to manage.
Retail
This asset class houses any type of business that sells directly to the consumer. These facilities can be stand-alone single retail, strip malls, or regional massive shopping centers.
These centers can range in size from 150,000 to 350,000 square feet. There is generally a big-box anchor store such as Target, K-Mart, or a grocery retailer. The number of smaller outlets can range from one to a dozen
These are generally single-tenant properties. They can be occupied by restaurants, pharmacies, fast-food drive-ins, etc. These facilities can be found in high-traffic areas.
This is a shopping center anchored by a major retailer such as Wal-Mart. These centers are usually 300,000 square feet or more. They have convenient locations near interstate intersections.
These malls can be either indoor or outdoor. They feature many specialty and higher-end shops. Food courts and restaurants are found in these facilities. Other entertainment outlets such as movie theaters reside in these malls. These malls range in size from 400,000 to several million square feet.
These shopping centers are smaller. 3 to half a dozen or so retailers are housed. As the name implies, these centers are found in neighborhoods rather than on major thoroughfares.
Hospitality
These facilities are built to serve travelers. They range in size from simple roadside motels to large resorts.
These facilities are located just off major interstates and close to airports. These hotels serve clientele looking for a one-night stay.
These hotels are close to business or tourist centers. They offer many amenities such as fitness centers and room service.
Each Commercial Real Estate Sector has Advantages and Disadvantages
Industrial provides some of the highest returns but also some of the highest risk. In the industrial space, the facility is generally leased to one or a few tenants. When a tenant vacates, the loss of rent can result in a 0% vacancy rate. Industrial facilities are built for a particular use, so finding a new tenant interested in the same lease terms is challenging.
Multifamily provides returns on investment better than index funds in the stock market. This asset class has also shown resilience through downward market spirals. It is considered by many investors to be a risk-adjusted good return investment.
Mobile home parks provide some of the better returns in the multifamily segment. Parks with few to zero park-owned homes are favored by many investors. Parks that own only the pads and no homes provide reduced management and maintenance expenses.
The self-storage sector is somewhat of a hybrid. It combines the benefits of industrial with those of multifamily. Self-storage combines the opportunity for higher returns on investment with decreased risk.
How to Win in Commercial Real Estate Investing?
The secrets to success in any endeavor begin with knowing yourself. Gabrial Hammel is an excellent example. In his younger years, he was focused on building his fortune in real estate. He was so focused on his real estate investing that he neglected everything else in his life. The neglect of his personal growth and development almost lost him his family. To learn more about Gabrial’s journey, tune in to his interview on Creek Side Chats.
The way to be successful in commercial real estate investing is to follow successful examples. The article, The Best Wealth-Building Property Investments, provides several examples of winning in commercial real estate investing. Each example illustrates the importance of knowing yourself.
Success takes more than self-knowledge. To succeed, we have to build upon self-awareness and educate ourselves in commercial real estate investing. The next step is to set your goals and expectations with a basic knowledge of commercial real estate investing.
To succeed, we must tenaciously stick to our plan. Scott Price provides an example to follow. He started small with his own private residence and found phenomenal success in commercial real estate investing through planning and discipline. Get to know Scott and tune in to his interviews: Creek Side Chats and Real Estate Investing Abundance.
In his interview on Real Estate Investing Abundance, Mark Kenney emphasized the importance of setting your investment criteria. As Mark stated, we can always look backward and wish we had put all of our money in this or that deal. On the other hand, we can look back and be glad we didn’t put a penny in that deal that went bad. All we can do is look at each investment opportunity with as much clarity as possible and make the best business decision based on our established criteria.
Pitfalls to Avoid While Making a Commercial Property Investment
There are several pitfalls. After witnessing a friend of his lose a lifetime of wealth-building investing, Brian Burke was motivated to write his book to keep others from experiencing the same loss.
According to Brian, the first pitfall to avoid is investing with the wrong syndicator. The first and most crucial step to investing in commercial real estate is finding a good, competent, and honest syndicator. There are many
unscrupulous players in this industry. Know who you are placing your hard-earned money with. Be sure they are trustworthy and honest.
To learn about other pitfalls to avoid, tune in to Brian’s interview, Alleviate the Fear of Losing All of Your Investment in a Bad Deal.
In his Real Estate Investing Abundance interview, Ira Singer stated that successful capital improvement projects require the involvement of competent and experienced contractors. Before investing, the passive investor should always ask the syndicator who they consulted regarding the capital improvement projections. If they haven’t consulted a professional contractor, be wary of their capital improvement projections. Learn more by checking out Ira’s interview.
Frequently Asked Questions about Commercial Real Estate Investing
An ROI of anything over 6% is considered good. In the world of commercial real estate investing, a 6% ROI is not very attractive. Commercial real estate investors consider 8% Cash-on-Cash (CoC) returns to be the baseline. An internal rate of return (IRR) of at least 14% is expected over the life of the investment. For ROI, CoC, and IRR definitions, see the Frequently Used Terminology on SteedTalker.com.
According to the Federal Reserve Bank of San Francisco, commercial property investment has outperformed all other investments for over 150 years. Commercial real estate investing with the right syndicator has the potential to change your financial life. With passive investments in commercial real estate, you can achieve financial freedom to gain more control of your time. Commercial real estate investing can give you the time freedom to more passionately follow your calling.
As stated earlier, ROI and CoC are considered reasonable in the range of 6% to 14%. The amount earned depends on the amount invested and the returns the investment produces.
These are just the basics. The tax advantages of passive real estate investing are significant. A $100,000 earned income can be taxed at 30%, leaving a “take-home” income of $70,000.
For example, investing $1,000,000 in stocks or bonds earning 10% will yield $100,000. When holding the investment for more than a year, the earnings will be taxed as a long-term capital gain. Long-term capital gains are taxed at 15% to 20%. This leaves “take-home” income at $80,000 to $85,000.
A passive investment in a commercial real estate syndication brings the advantage of claiming depreciation from income. It is not unusual for the deduction to be sufficient to allow the passive investor to claim zero income because the paper loss is greater than the actual income. The passive investor “take-home” income is a total of $100,000.
From these examples, you can see that the passive real estate investor can easily make 15% to 30% more than the wage earner or stock/bond investor.
Real estate markets are cyclical. The terms buyer’s market and seller’s market are frequently used to describe market conditions.
Buyer’s market indicates a market that is supposedly more advantageous to buyers. In such a market, the supply of properties for sale exceeds the demand. There are more properties available for sale than buyers ready, willing, and able to buy.
A seller’s market is just the opposite. There are more buyers ready, willing, and able to purchase properties in a seller’s market than there are properties available for sale. The seller’s market is considered advantageous to the seller.
As Yogi Berra once said, “It’s tough to make predictions, especially about the future.” Though imprecise, trends can give us some indication as to where markets may be heading. Timing a turn in the direction of the trend is much more challenging.
A more critical factor than timing is buying right. No matter where the market is now or where it is going, due diligence is the key to making the right purchase decision. It is better not to buy at the top of a market cycle, but if the purchase is good, it can be profitable at any place in the cycle.
There are many things to consider in a commercial real estate investment. More important than timing the market is the selection of the syndicator. Always do your due diligence on the syndicator. Let the syndicator do the due diligence on the property.
Conclusion
Commercial real estate investing is flexible enough to suit the needs of any investor who is looking for steady cash flow and capital growth. It is an excellent passive investment for busy professionals. There is probably not a better investment for those looking to build a passive income stream to create more time freedom.
There are as many ways to get into commercial real estate investing as there are investors. My favorite is investing in real estate syndications. The biggest challenge is finding a trustworthy and competent syndicator. Once the syndicator is found, commercial real estate investing is less complicated than purchasing your own single-family residence.
Commercial real estate investing has a proven track record of providing better returns than any other investment vehicle. Investing with a competent syndicator provides the most passive means of investing for these better than average returns. Most people view real estate investing as a hands-on investment. Investing in commercial real estate syndication makes this a hands-off investment.
Which is the most profitable form of commercial real estate investing for the small investor?
The most profitable form of commercial real estate investing is the one that aligns with your investment goals and objectives. An investment that is in sync with your values and aspirations will be the one that is most profitable for you.
You win in commercial real estate investing as you win at anything else in life. Know yourself, and you’ll find the path to success as a commercial real estate investor. Educate yourself so that when opportunities arise, you can make informed and wise decisions.
Like with anything in life, there are pitfalls. You can avoid the pitfalls through education and following the examples of those who are successful. Establish your criteria and stick with your plan. Make your best decisions with your eyes wide open based on factual information and reliable sources.
Invitation
Investing in commercial real estate syndication is frightening. Alleviate the fear by building a trusting relationship, schedule a FREE 30-minute call.
Your initial call will begin the trust-building. Initially, that is all it will be. There is no hard sale.
There will not even be a presentation of offerings. Even if you want to invest, an offering will not be made available. We will just get to know one another and talk about your investing aspirations. Mostly, I’ll listen. If you have questions, I’ll happily answer.
If you prefer email, send me a note with your thoughts, questions, and concerns to allen@steedtalker.com
About the Author – Dr. Allen Lomax
With careers in academia, podcasting, and real estate investing, Dr. Allen Lomax
inspires us to break open our minds’ secrets to success. Through passive real estate investments, he helps engaged professionals create time freedom to live abundantly in all life’s areas.