How to Invest in Commercial Real Estate

Commercial real estate is a term that describes properties used to make a profit. Some of the most notable examples of this type of real estate include hotels, warehouses, industrial property, medical centers, and office buildings. If you’ve done some investing in stocks and bonds, you should know that commercial real estate is very different. When you’re dealing with stocks, the main reason your purchase them is for their selling potential. On the other hand, you purchase commercial real estate so you can use it as a source of income.

When you invest your money in commercial real estate, you will have two options. Your first option would be to lease the property and charge the tenants rent. If you don’t want to do that, then you can also wait until the value of the property increases over time.

There are different types of commercial real estate properties that you can rent out to people. For example, if you have cubicles and parking decks, you most likely won’t have a hard time finding a company that would want to move in. Of course, you’ll need to know how to choose commercial real estate. This includes finding a good location and making sure that the property can expand in the future.

Keep in mind that the lease terms are usually much longer than what you would see in residential real estate. You can easily get a company to sign a 5- or 10-year lease. In case you have any warehouses or smokestacks, you can rent them out to a distribution or manufacturing company. The company would most likely want to sign at least a 5-year lease.

If you don’t feel like doing any of this, you can simply wait for the value of the property to increase over time. However, know that the value can also go down. Even when you think that you bought a perfect piece of property, something can always bring the price down. In case you live in a major city and the location of your property is great, chances are that the value will only increase over time. Keep in mind that you have the option to take a value-add approach to your property and make some improvements, thus directly increasing its price.

No matter what you choose to do with the property, there are three investment methods that you’ll need to consider. The first method is directly investing in it. Know that you’ll need somewhere between 20-30% of the purchase price for an equity contribution. If you don’t have that type of money on you at the moment, you can approach a commercial real estate mortgage and loan company.

Before a company like this approves your loan request, it will need to be satisfied with you and your business, as well as the commercial real estate property. Before asking for a loan, it’s a good idea to know how lenders qualify these requests. First of all, they will look at the type of property in question. They’ll also check out the location during their review process. Some of the factors that a lender will consider when it comes to you is your net worth, income, collateral, your others assets, and cash liquidity.

In case you don’t want to directly invest in a property, you can do a limited partnership with someone. This means that you’ll have the option of either both providing equity capital and owning a percentage of the property or manage it and make day-to-day decisions. Depending on the deal, the partner that provides equity capital may or may not be allowed to vote on major decisions.

The last investment method you should consider is a real estate investment trust. Going with this option means that you’ll invest some money in the property and you’ll be in a situation like you’ve basically bought stock in a company.