How to Get Into Commercial Real Estate (Without Being a Vanderbilt)
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
Investments, by their very definition, are risky. However, investing is also one of the key ways to truly build wealth for not just yourself but your family. Commercial real estate (CRE) is a hot topic, with opinions from all sides. Many feel, for example, that it’s impossible to get into CRE without being a Vanderbilt or coming from new tech royalty money.
There are plenty of myths flying around about commercial property purchases, so we might as well talk about the truths of the industry.
What Is Considered Commercial Real Estate?
Commercial real estate is considered anything within a commercial zone, such as storefronts, warehouses, hotels, car washes, and even land. Farms are considered commercial properties, not residential in most cases.
Myths about Commercial Real Estate
There are many myths surrounding CRE, including that it requires too much upfront money, it’s too complicated, and it’s too risky.
Too Much Upfront Money
The top myth about commercial properties is that they require too much upfront money. While it’s true that you probably can’t buy into a skyscraper for your first purchase, you can still pick up a modestly priced commercial property. The more repairs needed, the lower the purchase price. There are many ways to finance your upcoming purchase.
Too Complicated
Given that there are lease agreements, purchase agreements, and plenty of other contracts in play within the commercial sphere, some feel that it’s too complicated for new entrants. That isn’t the case at all. Today’s real estate investors enjoy a very supportive community both online and in real life, and CRE professionals are at your disposal for hire and advice.
Too Risky
While it’s assumed that CRE is too risky, this one is particularly subjective. After all, what really is "too risky?" All things have a degree of risk, including going outside to pick up the morning paper. Granted, that’s a fairly low-risk activity, but it’s not a zero-risk opportunity.
The Truth About Commercial Real Estate
The truth here is that this aspect of real estate is truly accessible to the average person. The same fundamentals that you would use to pick up a house are similar to the ones that you would use to pick up any commercial property. There are additional metrics to learn, but that doesn’t mean that it’s impossible.
Advantages of CRE
There are plenty of advantages around CRE, mainly variety, different types of tenants, and profit margins.
Variety
You have so many options to choose from in terms of property selection. Do you want to pick up an old motel and bring it back to glory? What about a restaurant? Do you dream about buying a warehouse and converting it into luxury loft apartments? You have plenty of options to choose from.
Different Type of Tenants
If you’ve only worked with residential tenants, switching over to commercial tenants may become a pleasant surprise. A business that is leasing space from you is focused on making money, and they don’t want to lose their space before they’re able to do that.
Commercial lease agreements are much more detailed than their residential counterparts and tend to attract tenants that really do take them very seriously. For instance, lease agreements with tenants tend to be longer, triple-net leases, meaning the tenant takes on financial responsibility for the property’s utilities, maintenance, and all other property expenses.
Profit Margins
When compared with residential properties, the profit margins can be not only quite high but consistent. Retail space can have a profit margin of 28% or better, but market conditions do have an impact on what margins to expect. Location and demand often go hand in hand, so it’s important to still conduct as much research as possible.
Disadvantages of CRE
Of course, we definitely want to cover some of the disadvantages found within the world of commercial real estate. Indeed, the major ones are complexity, project size, and sensitivity to market disruptions. Let’s cover those in a bit more detail.
Complexity
Complexity is a touchy subject because one person’s idea of straightforward may be complex to another person. It’s all relative these days. However, it is possible to get into a commercial project that requires more time, energy, and money than meets the eye.
Project Size
While project size is still completely in your hands, the truth is that CRE is going to still be larger than your typical residential property purchase. A small motel is still going to have a larger footprint than a small three-bedroom home.
That doesn’t mean that you have to give up on CRE, but you should understand what’s involved with your upcoming purchase.
This is where classic project management principles come into play. Break the project down into milestones and examine what actually needs to be done with the property. For example, if you’re trying to buy a restaurant in the future, do you already know who will run the day-to-day operations? Do you have enough financing to cover all of the expenses of the restaurant? The more questions you ask yourself, the easier this process will become.
Sensitive to Market Disruptions
We touched on one of the advantages of CRE that it’s stable, but that doesn’t mean that it’s immune to changes in the marketplace. Indeed, if the general economy goes down, the chances are good that there will be struggles in CRE. This is because the business community at large is still sensitive to the needs of the consumer marketplace.
If job growth slows or a lot of people start losing their jobs, people naturally pull back on spending. This has an effect on the CRE industry at large. For those operating multifamily units, this could mean increased vacancies as people aren’t looking to move during times of uncertainty.
You can surf the waves of uncertainty by reducing expenses and ensuring that you have reserves, but you would want to have cash reserves in place for any other aspect of your business.
CRE Investing Is More Accessible Than You Think
As you can see, you don’t have to be a Vanderbilt or a Kardashian to take advantage of commercial real estate. It’s a matter of looking at the available properties in the area, as well as making sure that you’re looking at how each and every potential fits into your portfolio. Can you take an existing CRE property and transform it into something even better?
Let your creativity run wild thinking about how each property can bring value to the community at large, and you’ll find it’s very easy to make commercial real estate a profitable investment avenue for the long term.
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