Guide on Commercial Property Investing for Beginners

Introduction

My name is Ali Choudhri, the founder and CEO of Jetall Capital, it is a company that deals with investment and management of properties. I have been working for Jetall Capital for twenty years, overseeing the management of both residential and commercial properties spread across Dubai, Mexico, the United States, and Europe. I have seen how it is far much easier than most of you think to invest in commercial real estate. So this is what we call commercial real estate.

The Diverse Commercial Real Estate Types

Like all other assets investors in commercial real estate are required to invest in some of their resources in order to buy some offices, shops, and even restaurants. But those three categories are not the only ones. Eight broad categories of commercial real estate are described as follows:

- Multifamily

A collection of two or more residential units under one ownership is referred to as a multi-family property, and such an apartment is common. A multi-family property can also be referred to as an apartment or a flat.

- Retail Store

A retail asset is occupied by a retail business that offers services and goods directly to the consumers. When it comes to retail properties, obtaining a location is vital as companies will only execute leases if the building is in the right region.

- Office Businesses

Office Businesses are purely business practices that take place in office buildings. Office buildings are occupied by office businesses such as law offices and a tech company.

- Industrial

Industrial properties are generally situated on the outskirts of the cities and are primarily used for manufacturing. Properties such as manufacturing plants and warehouses are examples of industrial properties.

- Hotels 

Hotels are businesses that offer visitors food and accommodation. They can provide additional facilities like spas, event rooms, and room service.

- Land

Undeveloped land parcels are known as land properties. They consist of infill land, brownfield land, and agricultural land. Infill land is the space between existing buildings; brownfield land is land that may be contaminated from its prior usage; and agricultural land is utilized for the production of crops and the rearing of livestock.

- Mixed Use

A single site or structure housing several commercial enterprises is known as a mixed-use property. Mixed-use properties include, for example, office buildings with industrial space on one side and apartments with ground-floor retail.

- Special Use

Commercial properties that don't fall under any of the aforementioned categories are classified as special-use dwellings. For example, football fields, parking areas, churches or temples, as well as water parks are a few examples.

Commercial Property Financing

As a person who has experience with commercial property, I would suggest that if you are just getting started with investing in commercial property you should consider financing options beforehand.

- Loans

They resemble private real estate mortgages but are only slightly dearer in relation to their interest rates. The ranges for charges are between 5 and 30 percent interest, contingent upon the lender's decision as well as the loan duration.

There are three types of CRE loans available in the market, which include owner-occupied, investment property, and commercial construction. Investment property loans are for property investors who intend to let the property out to clients for rent or lease. This type of loan is the most risky of this class of loans, hence more costly and harder to qualify for.

- Real Estate Investing Trust (REIT) 

REITs are also known as real estate companies. This is because they invest in income-generating properties. A REIT’s operation is that you entrust your funds with it and it goes to buy real estate. REITs are a good entry point into investing in commercial real estate since you don’t have to take care of the upkeep, repairs, and other nuisances. REITs have a stable income and you can invest in REIT stock through the securities market and REIT mutual funds.

H2: Benefits of Commercial Property Investments

Commercial property investing has many advantages, including a steady income growth and option, depreciation potential, and portfolio diversification. 

- Steady Income Stream

Investors lease their commercial properties to businesses and clients, thus creating a steady income stream. Commercial real estate leases are typically long-term, and this further secures a steady income stream for the investors.

- Depreciation Potential

Depreciation is the reduction in value of an asset over a period of time. Everything in a hotel depreciates with time; toilets, washing machines, refrigerators, and the building itself lose value while getting older. The land on which that building sits is exempt from depreciation.

In commercial real estate, depreciation is not exactly something that is considered bad in this type of investment since, according to tax laws, depreciation brings the benefit of the right to a depreciation tax deduction. In the case of real estate investments, the value grows, whereas the value of structures depreciates.

- Diversification

Commercial real estate would be a great addition to your investment portfolio because commercial real estate has fewer fluctuations compared to equities and mutual funds. Furthermore, there are no brokerage fees for commercial real estate, and you do have tax deductions and a steady income stream that is not sitting in the stock market.

Risks and Challenges

While commercial real estate investing has many benefits, it also comes with risks. While commercial real estate is a stable investment, market trends and unforeseen events can negatively affect the market.

Commercial properties are hard to maintain in many ways. As their owner, you have responsibilities towards your property, but this does not mean that you will be exempted whenever disaster strikes. You may also face issues with flooding, fires, and structural problems, which are not necessarily cheap.

The COVID pandemic was a shock to the commercial real estate market. The event has damaged that. Since many people began working from home, many companies allowed their leases to end since offices were shut down. This has left office buildings unoccupied with retail and restaurants going through poor profit margins; some businesses closed down, and the area has not yet come back to where it was before the pandemic.

Conclusion

Although commercial property investing could look intimidating, it is indeed easier than you think. One of the great attractions of commercial property investing is that it is capable of offering tax deductions, capital appreciation, and a steady income stream; it adds security and diversification to your portfolio. If you have set your heart on CRE investing, I would, with all my heart, encourage you to jump in.