Four things to consider before investing in commercial real estate

Investing in commercial real estate involves a very different game plan than investing in residential real estate. If you’ve been successful in the residential market and want to expand your portfolio, commercial real estate can be your next right step.

If you want to be successful in this vibrant market, it is important to have as much information as possible as you get started.

Here are four things to consider before investing in commercial real estate:

Patience is a virtue

Real estate investing can be a fast-moving business, which is why so many people are drawn to it. It requires quick problem solving and critical thinking, and a certain thrill comes with how fast things can change at a moment’s notice.

When investing in commercial real estate, timelines and deadlines are different. Because of the complexities and guidelines involved with buying and selling commercial real estate, things can take a little longer. If you know this going into your first investment, you won’t worry that something is wrong.

Implementing new systems, doing commercial-grade renovations, handling a switch in management, financing, and new construction projects take time, so you should expect setbacks. Doing your research will help you identify potential problems before you get started and prepare for them.

Learn the market (supply and demand AND market cycles)

Just like with residential real estate, understanding the market will help you make smart investment decisions. This means knowing whether you’re currently in a buyers or seller’s market, and how the geographic location plays a part in your investment strategy. Before you focus on the specifics of a particular property, you should learn all you can about supply, demand, and market cycles.

Identify (the different) risks

Every investor knows that with every investment comes risk. If you’ve invested in residential real estate before, you’ve probably learned how to identify potential risks and weigh them against your potential to maximize your ROI. And while commercial real estate comes with some of the same risks, there are different things to look out for when investing in commercial property.

Commercial real estate ties up capital in a way that residential investments don’t, and it is also heavily influenced by the status of the economy. If the economy dips into a recession, the impact can be much greater when you’re dealing with commercial properties. Fundamental changes in your area, such as zoning regulations, an oversupply of property, and infrastructure changes can impact your commercial investment in a way that you normally don’t have to worry about when dealing with residential real estate.

Not all properties are the same

There are four main classes of commercial real estate (office, industrial, multifamily, and retail) and within these classes, there are countless different types of properties that all have different rules and regulations when it comes to investment. The amount of money and work you’ll need for a successful investment depends on the type of property you choose.

Your investment strategy for a retail location in a shopping mall will be a lot different than your strategy for traditional office space. Things to consider when comparing types of commercial property include:

• Office space is usually less expensive per square foot than retail space
• Office space usually means less risk for the investor
• Retail spaces tend to be more landlord-friendly than office spaces
• Rent can be based on sales volumes for retail spaces Retail space can generate rental yields between 5% and 12%

All of these factors should be considered when deciding what kind of commercial property you choose.

Fianl thoughts

Investing in commercial real estate can be a challenging but exciting way to expand your portfolio, learn more about the local real estate market, and generate more income.

REIFGO’s goal is to give investors of every experience level the information they need to make confident and informed investment decisions. If you’re looking for higher income potential, more tenants, less risk, and superior appreciation value, it may be time to look into investing in commercial real estate.