Thinking of diving into commercial real estate? There is a lot of opportunity in commercial real estate both for the investor, renter, and as a real estate agent in the industry. Before you start jumping around looking for that opportunity, however, you’ve got to get educated on the commercial real estate basics.
In this article, we’ll break down basic commercial real estate definitions, go over the difference between commercial, residential, and industrial real estate, and discuss investing in commercial real estate.
Commercial Real Estate Definitions
First things first—what is commercial real estate?
Commercial real estate is real estate used for commerce (or commercial purposes), while residential real estate is used for living and industrial is used for manufacturing and producing goods. Commercial real estate includes office buildings, hospitals, retail space, and land.
There are also multi-use commercial buildings which combine two types of commercial real estate, such as a restaurant in an office building.
Most commercial real estate is expensive and requires more investors than would normally invest in residential real estate, such as a single-family house.
A single-net lease is where the tenant is responsible for paying property taxes on top of their rent for that building. The landlord covers the repairs, maintenance, insurance, etc.
Double-Net (NN) Lease
A double-net (NN) lease mandates that the tenant pay property taxes and insurance, as well as their rent. The landlord covers the repairs and maintenance.
Triple-Net (NNN) Lease
A triple-net (NNN) lease requires the tenant pay the property taxes, insurance, and maintenance for the property.
A gross lease is where the tenant is only responsible for the rent of the property, while the landlord maintains the property and pays taxes and insurance.
Class A Real Estate
A Class A building means the property is in a prime location, is upkept and updated with quality materials, and often has personnel on staff to maintain the property and attend to the renter’s guests/customers. These properties are usually the cream-of-the-crop—with the price tag to match.
Class B Real Estate
A Class B building means the property is a bit older and more out of date. They are usually more affordable and are often sought after by investors to update.
Class C Real Estate
Class C buildings are the oldest (20 years or older) buildings, and they are typically in the shabbier parts of towns and are in disrepair. Investors often shy away from these buildings due to the nature of the repairs as well as the location they are in.
Commercial vs Residential Real Estate
There are several major differences between residential and commercial real estate. Let’s dive into the buying process, leasing process, and selling process to get a broader view.
The Commercial Property Buying Process
Acquiring commercial property is typically a larger ordeal than a residential transaction. Because commercial property is more expensive, there are often multiple partners involved. Often, these partners have an acquisition team that goes out in search of more properties. If it’s just you and/or a few others, however, you’ve got to make sure you hire the right team to help you out.
You’ll want a real estate agent that works in the commercial real estate market.
Residential and commercial buying processes are so different that you’ll want one who is really good at commercial property transactions. They’ll already have their ear to the ground and will be able to dig up the right deals for you. They will also let you know what to look out for in the buying process.
One of the major reasons investors choose commercial real estate over residential is because of the leasing structure. Leases on commercial buildings can extend 10 years or longer, making them a more stable investment. The lease can either get paid monthly, although it is not uncommon for landlords to require large chunks of the rent get paid in advance.
Selling Commercial Real Estate
While you could definitely go the For Sale By Owner route in commercial real estate, even that looks very different from residential sales. You’ll need to reach out to other investors and know the right people to get a good sale.
Hiring an expert real estate brokerage to sell your commercial listing is a much better idea, as they often have investors on hand that are looking into buying buildings or property such as yours. The money you pay your brokerage will more than pay for itself in the time saved and money earned from using them.
Investing in Commercial Real Estate
There are two main ways to invest in commercial real estate.
The first is to invest for rental purposes. As previously mentioned, commercial real estate leases are longer in length, meaning they are more stable investments for unstable markets. If the market does happen to take a dive, for example, your investment should be fairly safe if your lease term is not up yet.
Investing for the rental income is often the more lucrative path in commercial real estate, especially if you have a Class A or Class B building.
Another way to invest in commercial real estate is to invest in property appreciation.
Because the businesses who rent out commercial buildings largely rely on location to make a living, and because real estate in prime areas is limited—the value of commercial buildings appreciate rather rapidly. This is especially true if you get into a lucrative location before it gains popularity.
Investors looking to use the appreciation as their investment should know that the market for this type of investment is a bit riskier than the rental market.
Start Commercial Real Estate Investing
The first thing you should do when getting into commercial real estate investing is decide where the money will come from. Do you have other investors that are willing to go in on it with you? Do you want to do some crowdfunding? You want as much capital as you can get before falling in love with a commerial property.
As with all real estate investments, your research is crucial to the deal you’ll get. You want to know your goal for investing and base the property after that. If your goal is renting, for example, you’ll want to know that rent in the area either has a solid track record of remaining steady, or is slowly inclining. You’ll also want to take a look into the location’s economy.
Another way to locate a great deal is to work with a top local agent. They’ll help you keep an eye out for the best deals, especially if it means they’ll be the agent to help you rent out the building.
For more information about commercial real estate investing, check out this post.
Hopefully by now you know a bit about the basics of commercial real estate. For more information about investment properties, make sure to check out this post. For more information about commercial rentals, you’ll want to look into this one.
Remember, commercial real estate is often pricer than residential real estate, but the stability of the investment is what makes it so attractive to investors. To invest in commercial real estate, you can a) go in it alone, b) work with partners or c) invest using a Real Estate Investment Trust (REIT).
When purchasing and selling commercial real estate, be sure to use an experienced real estate agent who knows your area well for the best results and deals.