You’ve decided that you’re doing it: 2023 is the year you are going to diversify your real estate portfolio and really start making strides towards earning that extra income.
But you don’t know where to start. Or even what types of commercial real estate exist and what the pros and cons are.
Commercial Real Estate Investment Properties
There are various types of ownership options that exist, especially when looking at real estate exchanges. But if you haven’t even started with diversification of your portfolio, it can seem overwhelming. So let’s start simple.
As opposed to purchasing your home (aka residential real estate), commercial real estate is used solely for business purposes. Commercial real estate is used as an income generator for the owner, typically through leases to tenants. The broad definition of commercial real estate means that you can go as small or as large as you are willing to invest as you build your business as a real estate investor, depending on your sources of capital.
In this article, we’ll go over the pros and cons of the four main types of commercial real estate to help you decide which is the best investment for you. Keep in mind that many of these types you may have to hire a management firm to handle leasing, tenants and so forth, so take that into consideration as you move forward.
Commercial Office Space
While office space is a common commercial real estate investment, do a lot of research on the area you are looking to invest in. Do you find a lot of white collar or blue collar workers in the area? How many are still telecommuting post-COVID? Check with local economic development offices and the Chamber of Commerce for potential business opportunities in the area that can utilize this type of space.
Commercial Office Space Considerations:
- Has several sub classifications, depending on building age, aesthetic,, location and quality of local infrastructure
- Easier to choose location, tenants for long-term usage and viability
- Can be a volatile market, depending on economy and local trends
Industrial Real Estate Investments
While it may not seem like it, industrial real estate investments are one of the most stable property types out there. There is a lot of potential diversity in industrial real estate, while also allowing for fewer tenants and a greater ability to convert the space into different usable spaces.
Industrial Real Estate Investment Considerations:
- Types include warehouses, manufacturing facilities, storage facilities and showrooms
- Currently a high demand in many areas
- Many tenants are long term, due to the logistical issues of moving a large volume of assets to a new location
- Higher yields and less maintenance than other types of commercial real estate
Multifamily Rental Properties
Stretching from a simple duplex to a full scale apartment complex or condominium structure, great investment opportunities exist in the multi-family sector.
Multifamily Rental Property Considerations:
- Typically not for beginners in commercial real estate (those just beginning in multi-family properties should invest in smaller properties, such as duplexes)
- Analyze potential properties for income potential, considering potential rent, parking and storage fees, maintenance and other expenses, and the surrounding neighborhoods. This is where pulling any comps is vital to determining a property to purchase or invest in.
- Determine your cap rate with a qualified commercial real estate broker to find a property that will be a safe investment
- Location is vital. Where other types of commercial properties, the location may not be the top consideration, you want to choose a property where people actually want to live.
- Bigger cash flow opportunities than single-family rental opportunities, but also typically require on-site property management to handle the large quantity of tenants and day-to-day operations
Retail Investment Properties
Typically longer than multi-family leases, retail real estate can seem like a great investment, whether you own a single storefront or an entire strip mall.
Retail Investment Property Considerations:
- Typically high return on investment, with longer leases (and therefore, longer term tenants, due to their individual investment in the property)
- Can have a lower initial investment, as opposed to other forms of commercial real estate
- Retail real estate can be more influenced by local economic conditions
As commercial real estate continues to recover and grow in the sector post-COVID, this is a prime time to begin investing in real estate as a potential additional income source.
As you look to invest in properties, whether you are new to the game or wanting to diversify, Preferred 1031 can help you with real estate exchanges to ease your tax burden.
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