Why Commercial Real Estate Investing Is the Perfect Arena for 2022 (And Beyond)
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.
As you might pick up from the overall theme of this site, we’re pretty much all in on commercial real estate investing. It is not just a hot topic now, but we believe that it is the perfect arena for 2022 and beyond. Even if you’ve been hiding out in the wilderness, the chances are good that you’ve heard at least a little talk about this pandemic thing.
It’s definitely real, but it’s beginning to fade into the background as more and more people are getting vaccinated, wearing masks, washing their hands, and fighting the weaker variants of the virus.
The entire world runs off of spending, and the United States is definitely part of the world. Indeed, people want to go back to spending the way they used to, and entertainment venues are high on the list. Now that people are beginning to travel and see loved ones, they want to go back to the experiences that they enjoyed most.
All this means for savvy investors is that they can profit on multiple levels. One, you’re looking at properties from motivated sellers and rescuing them from a sinking ship. Next, you’re giving back to the community by making that space viable again. Finally, you can improve the property and then resell it for a higher profit, or simply continue to own it and enjoy profits from leasing the space to other business owners.
The world, as they say, is your oyster.
The Issue with Residential Properties
We don’t think that residential properties are bad. The issue here is that residential properties can only grow so large. You are limited in terms of renovations in many cases. If the property is governed by an HOA, you are at the mercy of the HOA.
There are still ways to extract profit from residential properties, but why settle for only one strategy within your RE portfolio?
Differences Between CRE and Residential Properties
There are some big differences between CRE and residential properties. Here are a few examples:
- Size. Commercial projects tend to be bigger, with a higher focus on different ways to maximize income. For example, you can lease a small office building to a tenant and not have to worry about their day-to-day business operations.
- Growth. While residential properties do appreciate in value, commercial properties tend to appreciate dramatically based on market demand. A building in a very desirable business corridor within an area could fetch a high price tag if you wanted to resell.
- Structure. Business properties are structured for a very different type of tenant compared to their residential counterparts.
- Zoning. Every area is different, which means that you need to have a good working understanding of the zoning regulations in your area. Most of the time, the local zoning department is more than happy to answer any questions that you have.
If you want to make an impact directly on working professionals and families, then residential properties are certainly worth keeping. People certainly need good places to live, and taking care of residential spaces leads to positive word of mouth and fewer vacancies.
Pros and Cons of CRE
Like any other real estate purchase, there are certainly pros and cons to buying commercial real estate. When compared to its residential counterpart, you’ll find that the financing is much more complicated. Many investors can have "sticker shock" when they realize the loan-to-value ratio for a commercial property is much higher than when they were looking at financing for a residential property.
Indeed, commercial real estate is not financed the same way, which is a disadvantage in comparison.
However, here’s what’s so exciting about CRE: you can launch a very visible business, or fall back to being a landlord for another business. Either way, you’re giving back to the community in a very profound way, and many people take note of that.
Another point in favor of commercial properties is that local governments understand the need to offer tax incentives to get people to invest locally.
Make sure that you keep local zoning laws in mind. Some places, like NYC, have some pretty crazy zoning issues.
How to Manage Risks in Acquiring CRE Properties
If you’re trying to manage risks while considering commercial property acquisition, there are a few things to keep in mind:
- Set a solid budget. Looking at the financial constraints may not sound very interesting, but it’s important to know how much money you have to work with.
- Bring a trusted party to look at each property. This can be a real estate agent you trust, a friend, or even a potential real estate investing partner. It’s completely up to you.
- Stand on research, not emotion. It’s very tempting to get sucked into the potential of a property, but you need to see how well the property will function within your portfolio.
- Review all contracts carefully. Legal standards are higher for commercial properties, and you don’t want to end up in court because you didn’t read through things carefully enough. Don’t hesitate to have a lawyer review things either.
These are all basic fundamentals, but you would be surprised how many investors can throw caution to the wind when they see a potential deal. Just because you can get financing for a commercial property doesn’t mean it’s the right one.
The Commercial Real Estate Market Will Continue to Recover
Commercial real estate investing is truly the perfect arena for 2022 and beyond, especially when you really begin to study current market trends. While it’s true that demand isn’t back to pre-pandemic levels, consumers are anxious to get back to doing what they’re accustomed to doing. This holds opportunities for savvy investors who aren’t afraid to take a moderate bit of risk now to get deeper market penetration over time.
Some commercial property prices have gone up, but there are still plenty of bargains to be had through motivated sellers that are looking to offload their properties and get out of the business completely. You could make a reasonable offer and build a win-win situation for all parties involved.
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