Commercial real estate is an area that many investors look into if they have a large budget for investing. Some people believe it is a highly profitable investment whilst others see it as too much of a risk, resulting in a loss of money.
Commercial real estate will typically include a landlord designing a building for a business to work in. However, there is also residential real estate which can also be a profitable investment and this is the route that many investors also explore. Real estate investment can be highly profitable and produce a steady passive income throughout the year.
There are plenty of real estate properties that provide different uses. For example, people will buy real estate so it can be transformed into work warehouses, offices, shopping centres, restaurants and more. This will typically involve a group of landlords (or an individual) leasing the property to occupants that will make use of the building. It can be a great investment for those who have experience in real estate.
The Basic Understanding Of Real Estate
Commercial real estate is for investors who want to rent the property for both work and industrial use. Residential real estate is for landlords renting the property out to those who live in the building. It is also categorised into four primary sectors. This includes office space, multifamily, retail, industrial and rental. There are many other types of commercial real estate that an investor may consider. This includes hospitals, hotels, health centres, and shopping malls.
Before investing in real estate, make yourself aware of the three different types of property.
Class A – This would be the newer buildings in well-developed areas. This would be in good condition compared to other buildings and recently built.
Class B – This is the better class for commercial real estate investors. This would include buildings that are slightly older than class A but require a little work.
Class C – These types of buildings are far older than others. Furthermore, they would need a lot more work because they are deteriorating a lot, therefore the actual initial investment may be more affordable than the other but, it can be far more expensive over the long term.
What Is Commercial Leasing?
There are two types of landlords with commercial property. Usually, a landlord will buy real estate property for other companies to use. The landlord will then receive monthly payments from the tenants. The monthly payment will be calculated by a fee placed on each square foot. For example, £20 per square foot. This will then be multiplied by the number of square feet the commercial property is built on. Commercial real estate properties can also be owned and used by the landlord however, this would require more work for the landlord.
If a landlord wants to lease out the commercial property, the lease tenure would usually be around ten years. However, that has changed a lot recently, especially after covid-19. Office leases can be less than five years now.
One of the main reasons for lease tenures being so long is that they wanted to secure a fixed rate over a long period, especially if the market is increasing in the area. They also may want to secure a long-term lease because the current office has everything they want.
If commercial real estate investments appeal to you and you want to become a landlord, there are four types of leases you need to consider.
Single Net Lease – This is when a tenant is only responsible for paying the taxes of the property.
Double Net Lease – This is when a tenant is responsible for both taxes and insurance.
Triple Net Lease – A tenant is required to pay maintenance, insurance and taxes.
Gross Lease – This is when a tenant is only responsible for paying the rent. Everything else is in the hands of the landlord and some landlords may prefer this as they won’t let the property deteriorate like the tenant may do.
Depending on how much control you want as a landlord, there are many lease types to consider when renting your property out to tenants. The more you have to pay, the more you will need to charge the tenant so it depends on how you want to do it.
How Is Money Made From Commercial Real Estate?
Commercial real estate can generate a lot of money however, you can also lose money with your investment. Furthermore, it is very profitable in a couple of different ways. For some investors, they would like to buy the commercial real estate building and wait for it to gradually increase in value over time. For others, they would want to use it as a more stable income each month by leasing it out to tenants.
The Difference Between Direct and Indirect Investment
Direct investment may be better for some landlords. This is when they will be the owner of the property and decide what type of business they want. This is good for property investors who have in-depth knowledge of a particular sector.
Indirect investment into real estate would be the investor putting money into ETFs or real estate investment trusts. ETFs stand for exchange-traded funds and this is when they would invest in commercial property stocks.
If you are an investor that wants less work with your investment and a more steady income, indirect investments may be better for you. However, if you wish to have a much larger return on your investment, investment in commercial real estate property would be the better option for you.
Should An Investor Buy Land or Commercial Property
Amongst the real estate investing community, there is an ongoing debate about which is the better investment. Some people believe it is better to buy land, others believe it is better to buy real estate property. Let’s look at the positives for both buying land and real estate.
When purchasing land, it will be much cheaper than a real estate property. Due to the smaller amount of money spent, there is less money to lose. However, when investing in real estate, you will require a much larger fee for the building. A larger amount of money can lead to a much bigger reward.
Maintenance fees are something else to consider when buying both land and real estate. For older buildings, the maintenance fees could cost you a lot over time. Buildings deteriorate over time and therefore you must understand the additional costs of your initial investment. This is something you don’t need to worry about when buying land. It is highly unlikely that you will lose money when investing in land.
If you are looking to buy land for building a commercial real estate property, this will require a lot more money than the initial investment for buying property. There are many things to consider such as plant machinery. Excavators, dumpers and telehandlers hire would be required when building real estate property. You would also require cranes if the buildings are large. There are other costs as well such as raw materials and paying for construction workers. During this period, you will be spending more money than you are gaining. Nonetheless, the finished product will be worth a lot of money if the project is completed professionally.