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Successful businessman Ofir Eyal Bar shares his knowledge and experience about commercial real estate investing in this post.
Commercial real estate includes retail space, apartment buildings, offices, warehouses, and so on. This type of real estate generates income through appreciation of the property as well as from business revenue.
Whenever property is used for the purposes of generating a business profit, it falls under the banner of commercial real estate. As a commercial real estate investor, the owner’s upfront costs are typically greater than a standard investment option.
Some Examples of Commercial Real Estate
There are many examples of commercial real estate. For example, there are shopping centers, farms, industrial warehouses, and office space. For the savvy investor, commercial real estate is a viable option for diversifying a portfolio along with risk-adjusted returns.
On the other hand, as an investment vehicle, this type of real estate is laden with complexity and requires careful evaluation. Many folks assume that these types of investments are similar to investments in the financial markets.
However, there are notable differences. For starters, real estate is a hard asset and is a scarce resource. With stocks, the objective is to buy low and sell high. Stocks are therefore not useful as a source of income, generally speaking.
How Commercial Real Estate Generates Income
With commercial real estate, the investor charges tenants a rental for use of the real estate. It also has the ability to appreciate over time.
Long-term appreciation of commercial property adds value to the investor’s portfolio. However, it is possible that it will lose value over time, resulting in an upside-down asset. In other words, it is possible for commercial real estate, like any real estate, to move in either direction regardless of the intentions and experience of the investment professional.
However, people tend to bank on real estate as a safe investment over time, owing to the fact that it is a scarce asset. Land is finite and this is an inherently valuable attribute of this asset category. With increased economic activity, scarcity of land and high-quality real estate becomes a real phenomenon.
Generating Rental Income
When generating rental income from commercial real estate each tenant will have different requirements and arrangements with their landlord.
There are several broad categories of rental income that can be derived from commercial real estate. These include smokestacks and warehouses, multi-family apartment buildings, parking decks, and cubicles. With the exception of industrial rental income, most lease terms are month-to-month or year-to-year.
Warehouses and smokestacks typically lease for five years or more. The tenants in commercial real estate rentals are generally businesses, not people who want to live in the investment property. This is because they are renting offices, cubicles, and warehouses for their businesses.
Some Important Features of Viable Commercial Real Estate
The most important features of a viable commercial real estate opportunity include:
- Commercial tenants
- The right contract duration
How to Be Smart About Your Investment
As a real estate investor, it’s important to be smart about your property. Therefore, optimize the space for maximum rental revenue. This means cubicles should be designed for maximum yield. Warehouse space should be optimized, along with parking spaces, office space, and so on. In fact, owners can increase their rental revenue by renting parking spaces as independent units, either daily or monthly.
Also consider offering various other services, such as advertising space. One of the biggest benefits of commercial real estate transactions is the tax benefit they bestow. That’s because this type of real estate is a tax-deductible expense. For example, it’s best to set up a business and then purchase commercial real estate for investment purposes. That’s because there are greater tax savings and benefits this way.
Making It Count with Commercial Real Estate
Real estate investors are always looking to maximize yields on large-scale commercial projects. For example, an investor who purchased a multi-apartment building for perhaps $10 million might seek to renovate the apartments in that building. Then the owner will be able to generate higher rental returns over time. Or they can simply sell the property for a greater capital return.
Notable commercial real estate investors such as Ofir Eyal Bar have capitalized on such ventures through years of research, networking, and property management experience. It takes time to develop the necessary skills and expertise to create a diversified portfolio inclusive of commercial real estate. It is also true that these investments typically require a much higher capital outlay than private real estate investments.
Things to Consider When Buying Commercial Property
The process of buying commercial real estate with the objective of renting it out later must factor in several important elements. These include sourcing the appropriate property at the right price. Then there’s rehabilitating the property with necessary repairs, furnishings, fittings, and so on. Finally there is renting it out, refinancing, and repeating the process.
For one thing, the sheer size of the property comes into play, and the scope of operations is much greater. Most of the time, these opportunities are the purview of institutional investors and management consortiums. Investors with deep pockets and extensive management experience tend to fare best with commercial real estate.
A Final Word
For more tips and ideas about these types of investments, check out Ofir’s YouTube channel.