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Tips for investors planning to foray into commercial Real Estate

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Real estate has always been and would remain the most preferred and trusted investment avenue for investors seeking long-term avenues to park their money. According to a recent survey, 50% of investors prefer real estate investment. This sentiment is mainly driven by this asset class’s stability and sustainable growth over the years.

While real estate can be broadly classified into 4 types, one of the highly restricted yet promising segments, Commercial Real Estate (CRE) is now democratized through various investment models. Here are the key models and factors to remember before you set foot.

Fractional ownership – It can be termed as a formal setup in which groups of investors pool funds to purchase a property. They share passive ownership of a high-value asset. This approach reduces the financial burden on a single investor to own a property and allows the investor to earn returns on the investment. This investment can also be made through a mediating platform that carries out all the due diligence and scouting A-grade properties, minimizing the overall risks associated and giving a clearer picture of the expected returns.

The investment made through fractional ownership is directly under the investor’s control and generally yields higher returns.

REITs – They can be termed as mutual funds for real estate. In REITs, an investor can invest a fixed sum which will then be proportionately allocated among various prefixed properties. The essential advantage of this model is that it is available for a few thousand, making it affordable for most investors. However, one crucial factor to remember is that the investor has no control over the investment, which could remain idle due to various factors that would result in low returns.

After understanding the investment models, it is also essential to look at the different factors while venturing into any new asset class.

Learn to think like a professional if you want to succeed in commercial real estate. Take note that commercial and residential property is valued differently. Keep in mind that leases for commercial property are generally longer than those for single-family homes, resulting in greater cash flow. Keeping the primary market and industry research handy could significantly aid in making the optimal decision.

The performance of your asset is significantly influenced by its location. Both residential and commercial real estate are subject to this.

When assessing a potential commercial real estate investment, numerous location-related factors, such as asset access, zoning and other location-related difficulties, must be taken into account.

The number of amenities, elevators, lobbies, ceiling heights and similar features can describe an asset’s quality.

Developers use classes like A, B+, or B to describe the asset. Returns on investment are better when your asset quality is top grade.

Your return will be more consistent the longer your tenant stays. That is dependent upon the area’s vacancy rate. Expressed as a percentage, vacancy rate compares the amount of time a property could be rented to the amount of time a property was actually rented, generally over one year. Tenants are less inclined to look for other rental properties in areas with vacancy rates of less than 4-5 percent. Investing in a property in this location will also guarantee consistent rents and progressive capital growth.

CRE lease structures differ from residential lease structures. They can be set up with rent hikes every four years and a structure of 4+4+4 years (12 years). While the landlord cannot demand that the tenant leaves during the lease term, they are free to do so at any moment. In addition, there will be a lock-in period. The investor obviously benefits more from a more extended lock-in period.

Building your CRE portfolio? Remember these tips

  • Real estate investment is only profitable in the long term
  • Customize your investment based on the market, as every need has its unique proposition
  • Give serious thought to the expected IRR claimed to you, including the vacancy and market rental rate

Finally, when choosing to invest in CRE, remember that buying commercial real estate only pays off in the long run, and it’s always a good idea to diversify your portfolio and invest in multiple assets. What may apply to the residential real estate market may not apply to commercial real estate.



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Disclaimer

Views expressed above are the author’s own.



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