Understanding commercial real estate investing can be your ticket to financial freedom and wealth building. Thanks to the variety, deal structures, and additional benefits, many investors turn to CRE as a stable and lucrative way to diversify their portfolio and build a strategic and consistent cash flow.
Even if you're an experienced investor, returning to the basics and refreshing your knowledge never hurts!
Today we break down some of the fundamentals of CRE investing, some strategies for investing in commercial properties, and an easy and proven way to learn more about this investment strategy and enter the market.
What Is Commercial Real Estate Investing?
Commercial real estate refers to land and property used for commercial purposes to generate income.
Common types of commercial real estate properties include:
- Offices
- Warehouses
- Multifamily buildings
- Retail stores
- Industrial properties
Unlike residential properties and multifamily buildings, CRE is used for business activities rather than for providing housing. Commercial buildings are classified as A, B, and C, with A being a new and highly desirable building in an elite location and descending in quality from there.
Some of the benefits that draw investors to CRE include the potential for higher returns, more substantial tax offsetting opportunities, greater diversification, and longer-lease terms protecting against market fluctuations.
How Do CRE Investors Earn Money?
Commonly, investors purchase commercial real estate to produce positive cash flow. This means earning more rental income from monthly payments than the incoming expenses.
Expenses include mortgage loan repayments, taxes, insurance, maintenance, vendor payments, or other local or state-mandated fees. The more positive cash flow investors access, the greater their equity in the building, meaning a stronger bargaining position and ownership in the asset, which can be used to reinvest or strengthen their portfolio.
Additionally, investors may seek out commercial property investment opportunities for long-term appreciation by selecting a property that they believe will increase in value over time and can be sold for a profit or by adding value through updates and upgrades to amenities.
However, it's worth noting that these two strategies are often employed concurrently.
Commercial Real Estate Investment Strategies
Real estate falls under two general categories: active vs. passive. These broad strategies are further divided by investment deal structures and approaches, some of which we will look at below.
Active Investing
Active investing involves direct ownership and management of the asset. This means hands-on management from syndicating and organizing the deal, preparing legal arrangements, ongoing tenant management, maintenance, and more.
Residential investing is a common active real estate strategy, as it works at a much smaller scale, and investors can exercise more control over the asset with greater outstanding dedication and fewer legal and fiscal restraints.
Direct investment in a commercial real estate deal is often reserved for high-income or asset-rich investors with a solid commercial real estate field background.
Passive Investing
Passive investing is an investment strategy in which an investor provides capital to an experienced partner who manages the deal on their behalf (and on behalf of other investors). In exchange for this capital, the investor relinquishes the duties of an 'active investor' and puts the deal administration and day-to-day responsibilities in the hands of a commercial property investment group.
A commercial real estate deal's scale, complexity, and capital requirements mean that most deal types are passive arrangements. While it can be risky (like all investments), the right investment group with a proven track record can provide consistent gains for investors with little downside.
Thankfully there are many passive ways for investors to access the power and stability of a commercial real estate deal passive.
Some of these include:
- Investing in a private equity fund that manages a commercial real estate portfolio
- Using an online crowdfunding investment platform to take part in a significant deal
- Taking part in a syndicated deal as a limited partner (LP)
- Buying shares in a Real Estate Investment Trust (REIT), which is a publicly-traded company that buys and manages commercial property on behalf of investors
- Investing in an Exchange Traded Fund with a company that holds a real estate-heavy portfolio
Passive investing is also possible when purchasing a commercial property and turning it over to a commercial property management group to manage the asset!
Working With a Professional Group
Legal complexities, management demands, and massive capital barriers to entry mean that commercial real estate investments can be challenging for most everyday investors to enter alone. Working with property specialists who understand a specific market and can guide you on the right course of action is invaluable to success in CRE investment.
For example, our experience, relationships, and deep history in the Chicago area mean the Brian Properties team can help investors find great deals in the real estate Chicago suburbs offers that others might overlook. We help investors identify opportunities, negotiate contracts, handle tenant relations, property management, and much more.
Explore Commercial Property Investment Opportunities With Expert Guidance
We hope these basics have been helpful! Whether you're new to investing, have closed a few deals, or are a seasoned professional, if you're ready to learn more about commercial real estate strategies from Chicago CRE experts, reach out to the Brian Properties team today.
You can also gain insights from our free resource, the "Ultimate Guide to Investing in Commercial Real Estate!"
