7 Things to Know About Commercial Real Estate Investing

Most of our focus at USREEB is on single-family residential properties, but today we’re going to shift gears a bit and talk about commercial real estate investment. This is a whole different animal than residential investment, and it comes with a different set of rules and strategies. If you’re an experienced investor who’s focused primarily on residential properties but are ready to try your hand at owning a commercial building, here’s what you need to know before jumping in:

1. Commercial properties are valued differently than residential ones. While comps from neighboring homes are what determine a residential property’s value, commercial properties are valued based on their cash flow, or how much income they can produce.
2. Securing a commercial loan is not like securing a home loan. Commercial lenders are going to scrutinize you a lot more than a residential lender, and they’re not real keen on risk. Some other key differences between the two loan types are that bigger down payments are required for commercial borrowing, interest rates are often higher, and repayment terms usually shorter.
3. It’s a longer process. The turnaround time on landing a commercial property is a lot slower than that with residential. Some home investors will look at a property and have an accepted offer with paperwork rolling in the span of a few hours. Because commercial properties are bigger and there’s more cash involved, the process naturally takes longer.
4. Securing tenants for non-residential buildings may more challenging. Everyone needs a place to live, but not everyone needs a building for their business. Business owners also usually have very specific spacing needs for their company, and if your building doesn’t offer what they want, they’re going to look elsewhere. However, once you do land tenants, you’ll likely have them for awhile, because leases are longer and moving a business is usually such hassle that most business owners avoid it.
5. You’re going to spend more time managing it. When you have a commercial unit housing multiple tenants, your workload will be substantially more than what you’re used to with a residential property. Between managing multiple leases, maintenance issues, and dealing with public safety factors (because members of the public will be present at your property), you’re going to be putting in a lot more hours.
6. You’ll be hard-pressed to take on a commercial deal solo. Most commercial property owners operate in partnerships because this helps minimize the property costs and associated risks for individual owners. Even if you’re the sole owner, though, a commercial property usually requires entering into an agreement with someone else, like a property manager or maintenance provider who can provide professional services.
7. The income potential is nuts. There’s a reason why commercial properties are appealing to so many investors – you can make A LOT of money off them. Annual returns on commercial properties are significantly more than what you’ll get with a residential investment – like 5% to 8% more.

Commercial properties aren’t for the faint of heart. There’s a lot of legwork that must be done to purchase this type of real estate, and plenty more to do after the deal is closed. However, the payoffs can be incredible, making the whole experience a worthwhile and very profitable one. The main takeaway here is this: just because you’re an experienced residential real estate investor does not mean you’re ready to take on a commercial property. If you want to explore this type of investing, it’s critical that you put in the research and learn all you can about commercial investing before closing any deals.