People have built financial empires by investing in commercial real estate. Don’t expect to purchase a piece of property and start reaping financial rewards, though. You need to take a savvy, strategic approach to buying, selling, developing, and leasing commercial real estate.
The following guide to making money in commercial real estate will introduce you to the fundamental concepts behind smart CRE investing.
Buy Commercial Real Estate and Rent to Businesses
For a steady stream of revenue, purchase commercial real estate and start leasing individual areas to businesses. You could buy a shopping center and rent retail spaces to stores. You could buy an office building and rent spaces to companies that need office space for their employees.
Many businesses do not want to commit to buying commercial real estate. They would rather lease the space they need so they can grow and shrink as needed.
Several factors influence how much you can charge your lessees. Before buying commercial real estate property, consider:
- Whether the place has a convenient location that attracts stores/tenants and customers.
- If the property already has the features businesses will need, such as an IT infrastructure and security.
- How much it will cost you to maintain the property. Expenses include cleaning, regular maintenance, security, and building upkeep.
- How long it will take before you start earning profits from the rental property.
- How the cost of loan interest, insurance, property taxes, and other necessities will cut into your profits.
Recommended reading: How to Value Commercial Property
Buy Commercial Real Estate and Develop the Property to Attract Renters
Instead of buying commercial real estate ready for businesses to start using, you can invest in a property that needs some development. As long as you develop the right property in the right ways, you should find that you can attract businesses willing to pay higher prices for excellent office and retail spaces.
Before the pandemic, many CRE investors attracted tenants with amenities like shared workspaces, open floor plans, and on-site cafes. Businesses might still want those features, but they have more realistic expectations in the post-pandemic world.
According to Deloitte, 56 percent of companies agree or strongly agree that “the pandemic revealed issues surrounding technology and digital transformation”, such as working with remote employees and adjusting to supply chain disruptions. Only 5 percent of companies somewhat disagreed, disagreed, or strongly disagreed.
Business tenants bring much of their own IT equipment to meet their needs. Potential tenants will, however, expect you to offer a basic infrastructure that they can build on. An infrastructure that helps businesses build robust networks has become just as critical as electrical outlets. Without an infrastructure that meets basic needs, tech-savvy businesses that adjusted to and survived the pandemic will look for other accommodations.
Buy Commercial Real Estate and Sell for a Profit
Commercial real estate investment can work just like any type of investment. You purchase properties at low prices, hold onto them until the values increase, and sell for a profit. The COVID-19 pandemic has damaged the portfolios of many real estate investors. When it comes to investments, though, every negative change creates an opportunity.
At the beginning of 2020, the values of most commercial real estate plummeted. Retail space prices fell about 15 percent by the beginning of 2021. The values of office space fell by about 5 percent. Only industrial properties increased in value, and they did so enormously.
Perhaps even more importantly, experts do not expect commercial real estate values to improve for a few years. Office spaces should return to 2019 values by 2022. Retail, however, will not reach pre-pandemic prices until 2024.
The hit that the industry took has caused financial problems for a lot of people. No reasonable person would deny that. If you have enough capital to purchase commercial real estate, though, now is a terrific time to invest. You might not get the revenues that you would normally expect from the leasing office and retail spaces, but you can get the property at 5 to 15 percent below typical prices.
Considering how low commercial real estate prices have fallen since the beginning of 2020, it might make sense to borrow money to fund your purchase. Every lender will require a significant amount of capital before letting you borrow money. If you can pay 20 percent of the property’s cost, though, there’s a good chance that you can get a business loan with a reasonable interest rate. As long as the interest rate isn’t so high that you can’t remake your money during the sale, you could earn a tidy profit even after repaying the loan. Keep in mind that you will spend less on insurance if you manage to sell the property as soon as prices return to normal.
Buy Commercial Real Estate and Develop the Property to Sell for a Profit
Development can also play a crucial role in earning money from selling commercial real estate. The IT enhancements mentioned above apply, but you should also consider attracting buyers with green energy renovations.
Property buyers think about the long-term costs of owning and managing a property. Eco-friendly updates can lower potential expenses and help ensure that buildings meet future regulations. Some of the most important features include:
- Connecting renewable energy sources to the build (or choosing a property that connects to a power grid that relies on renewable resources, including wind and solar).
- Updating systems to make the building more water and energy-efficient.
- Reducing the amount of pollution and waste that a building generates.
- Replacing existing materials with non-toxic, ethically sourced materials.
- Choosing features that will improve indoor air quality for the health of workers, customers, and clients.
When you make the improvements, apply for green certifications you can show to potential buyers. You can’t expect buyers just to accept your word about the upgrades. You need certificates that prove they will benefit tenants and buyers for decades to come.
ProspectNow Can Help You Evaluate Commercial Real Estate Opportunities
Lower the risk of investing in commercial real estate by relying on a trustworthy platform that has been helping buyers, sellers, and investors for more than a decade. ProspectNow gives you access to a database that lists millions of commercial properties and the contact information for their owners. Reaching out to them before other real estate professionals do might give you an opportunity to purchase properties at lower prices.
ProspectNow also uses predictive analytics to help you focus on owners who are likely to sell. Predictive analytics looks at a broad range of factors—including public foreclosure announcements and which properties have lost renters—to give you an edge over your competition. When you know that someone might want to sell commercial real estate for financial reasons, you could find that you can buy the property for less money than someone unaware of the owner’s position.
Not sure whether ProspectNow has the database and features you need to succeed? Sign up now to see how your approach to commercial real estate investing could change when you have an updated CRE database that includes the contact information of property owners.