Advice for Commercial Real Estate Equity Investors
Investing money in the commercial real estate market – restaurants, service stations, retail space and other similar properties – can bring in a lot of money. Because commercial real estate equity investors generally face less volatile business cycles than other sectors while providing regular income, this part of their portfolio gives them security against such investments as the stock market. Commercial real estate assets provide stability when managed properly.
While the majority of commercial real estate properties return a profit at the time of sale, the majority of the profits that roll in come from tenants paying rent. Commercial property owners who negotiate lengthy leases can provide security when other investment vehicles fluctuate. Here are some tips to help you make the most money in this sector.
When Equity Investing, Look for the hot spots
Several recent studies have shown that the commercial real estate market is set to encounter considerable growth over the next few years. Prices in the Vancouver area have already taken off, but there are also areas in Winnipeg and Toronto that are anticipated to show considerable growth as well. Alberta has suffered a series of setbacks due to the extended period of time in which oil and gas prices have stayed low.
If you want to move into the commercial real estate market, you can go through a number of commercial real estate firms to find the right investment. Trulia and Realtor.com are some websites that have searchable databases with commercial property listings. LoopNet is a website that specializes in commercial listings only, while the first two also list residential properties.
Something to consider is the size of the down payment you’ll need to purchase a commercial property. For a residential purchase you can get by with as little as 5%. However, when it comes to commercial property, expect to have to put down at least 30%, in most cases however there are programs offered in conjunction with the mortgage insurers where smaller down payments are accepted or via vendor take back arrangements. If this is more than you or your investment group has on hand, you can think about putting your money in a real estate investment trust (REIT). This is a company that operates properties that generate income and then sells interest like stocks through the major exchanges, allowing for direct investment in real estate. REITs provide a great deal of liquidity and frequently offer high yields to their investors.
In Commercial Real Estate, Consider indirect ownership
A commercial mortgage-backed security (CMBS) is another way to invest in the commercial real estate market. Indirect ownership allows investors to profit from gains in the market without having to deal with some of the issues that come with owning and managing a property. It’s one thing to manage a rental home, but when it comes to owning commercial real estate, there are many more factors that go along with managing the buildings. Direct investment is also a lot less liquid than the security end of the market. It’s true that rents come in regularly on a monthly basis, but the money that the investors tie up in a property when they purchase it is only accessible when they sell the property. If an investor is part of a syndicate, that investor has to get the rest of the syndicate to agree to sell – and the time may not be right as far as the market cycle. Investing in a CMBS (or an REIT) is a terrific way to keep your liquidity at a maximum while also gaining from profits in the market.
Understand the bottom line in Commercial Real Estate Investing
The stock and commodities markets come with a great deal of volatility. While there are some high returns to be made, there is also considerable risk. Investing in commercial real estate offers access to high returns as well, but the long leases that come with commercial leases mean security for the owner. For those who don’t have the money on hand to pay the down payments involved or to deal with the management issues that come up with properties of that size and complexity, investing in such indirect vehicles as CMBS and REITs give investors access to the profits available. Finding the right commercial realtor and the right commercial mortgage broker can make all the difference when it comes to securing the right investment deal. Diversify your portfolio with the security that the commercial real estate market can bring.