We all know that real estate is a great way to diversify your investments and lower your exposure to equities and bond markets, yet commercial real estate investing is rarely discussed when this subject is broached. Commercial real estate investing may not have reality TV shows highlighting its benefits like its residential sibling but it offers a variety of very attractive aspects to the investor looking for diversification.
If you invest in a house to flip or even to rent, you’re putting your eggs all in one basket. If that house can’t sell, you can’t fill it with a renter or worse yet you have a combatant tenant who refuses to leave or pay their rent you’re in a world of trouble. The mortgage, maintenance and carrying costs of that house will bleed you dry. On the other hand, if you took the same money and invested in a ten-unit apartment complex you would be spreading your risk out amongst ten tenants. Not one tenant could decide your financial success, and short of a full-scale revolt amongst all tenants you’d be able to weather any storm.
Commercial investing also has the added benefit of being valued differently. When assigning a valuation to commercial property you do so based on the income it provides you. When deciding the same figure for a residential property you must rely on the market and what comparable sales are doing. So if there is a glut of houses like yours on the market, or motivated sellers had to accept lower prices, your house will be valued at less. Commercial property’s value can be increased by increasing the income the property provides. Cosmetic improvements and other changes that would allow you to increase rents is the most common way to increase income and valuation. Since net income is a function of revenue minus expenses, you could also decrease costs to increase your income. By lowering or passing on maintenance costs to the tenants you can increase net income and increase the valuation of the property.
If you’re sold on commercial real estate investing you need to do your homework just like any other kind of investment. Talk to realtors, double check what rents the market will bare and get a firm understanding of the cash flows of any property you are looking at. Numbers can sometimes be fluffed to make the property’s outlook more optimistic than it really is. Make sure you are dealing with real numbers and not estimates.
If you’re new to property but want to get involved in commercial property investing being a silent partner or part of an investment group may be for you. Letting those who know what they are doing handle your money, or a pool of money you have contributed to, is a great way to reap the benefits of commercial real estate. Real Estate Investment Trusts (REITs) also offer exposure to the commercial real estate market through a real estate mutual fund set up.