The world of commercial real estate investing is an exciting one filled with abundant opportunities and fruitful rewards for those willing to give it a try. However, if you’re just getting started, you might feel skeptical or even a little nervous about the processes involved.
In this guide, we’ll take you through the ins and outs of CRE investing — from its fundamental principles to the crucial reasons why it’s a sought-after investment avenue.
It’s important to keep abreast of the core principles and trends as you get started on your journey. Following the COVID-19 pandemic, there has been a renewed interest in e-commerce which led to more investor interest in CRE. The construction of commercial real estate has also been on an upward trajectory.
So, whether you’re a seasoned investor looking to diversify your portfolio or a curious newcomer seeking more lucrative financial ventures, we’ve got you covered.
Plus, we’ll give you insights into the game-changing role CRE technology, like Blooma, plays and how it can take your investment strategies to new heights.
Understanding Commercial Real Estate
Commercial real estate is pretty easy to understand from a definition standpoint. As the name suggests, CRE refers to properties used first and foremost for ‘commercial’, that is, business purposes.
These properties usually serve as a bustling hub for commercial activities, aimed to provide business user experiences for groups like entrepreneurs, SMBs, and bigger corporations that are focused on creating a thriving business ecosystem.
You’ll encounter many types of asset classes and CRE property types, however the most common in the commercial real estate industry are:
- Office Spaces that act as workspaces for employees and can come in varying scales, depending on the demands for tenant experience, from towering skyscrapers to more modest buildings.
- Industrial Facilities which are vital for manufacturers and distributors. These could include factories and warehouses.
- Retail Outlets such as popular and expensive shopping malls, restaurants, and boutiques, that directly engage with consumers on a day-to-day basis.
- Multifamily properties which, unlike residential apartments, cater to a more extensive/larger number of tenants and provide various asset management ranges in terms of rental income brackets.
- Special Purpose Properties are on the more niche side of property management, catering to unique stakeholders. Examples include schools and entertainment venues.
Why Invest in Commercial Real Estate?
You probably hear it from real estate professionals all the time that are trying to convince you to get on board. They’re not wrong.
Investing in commercial real estate can be incredibly profitable for your long-term financial future. Whether you’re considering a high-scale property in New York or considering alternatives like leasing, here’s what you should know before diving in with CRE.
CRE gives you the following perks:
- Substantial Potential ROI: With the higher property valuation comes higher price tags attached to rental income. This gives you more attractive cash flow projections which can contribute to your long-term profits.
- Long-Term Value Appreciation: As with most real estate properties, CRE provides the potential for long-term appreciation. With more investment dollars going into real estate, plus the economy’s growth, these properties can help you build your wealth empire.
- Stable Tenancy: Commercial leases are for the long run, spanning several years. This means you get a reliable income stream with a commitment from long-term tenants, reducing vacancy risks.
- Inflation Hedge: When the cost of living rises, property values and rental incomes. This means you can use it to protect yourself against purchasing power distortion owing to real-time inflation increases.
- Tax Benefits: CRE investments also offers you tax advantages in the form of depreciation deductions, tax incentives for special properties like energy-efficient properties, and more.
Basics of Commercial Real Estate Investing
If you want to make the right decisions, you have to be equipped with the basics from the get-go.
Here are the most important aspects for you to consider:
- Market research: This involves analyzing market trends, supply and demand, and important economic indicators that influence property. How successful a commercial property can be also highly depends on its proximity to certain amenities, transportation hubs, and the related demographic information of people in the locality.
- Financial analysis: Cash flow, capitalization rate (cap rate), and ROI are all important metrics in assessing the profitability of commercial property. A positive cash flow is important, whereas the cap rate will give you an idea of how much income the property can generate in relation to the purchase price.
- Risk assessment: As you evaluate the property, make sure to look into market risks (related to the economy and industry), tenant risks and vacancy periods (which can impact stability and potential cash flows), and property risks (such as the maintenance and repair costs).
- Legal considerations: Zoning laws dictate how properties can be used whereas local building codes, and other legal regulations, must be adhered to for overall safety and environmental protection.
The Process of Commercial Real Estate Investing
Are you ready to get started? Here’s a brief outline of the key steps involved in the CRE investing process:
- Research and goal setting to identify potential investment properties and compare them to your own investment goals.
- Financial preparations which could involve analyzing your personal funds, lenders/investor scope.
- Property hunt through the help of commercial real estate brokers who are aware of your investment criteria.
- Due diligence to confirm that the selected property is compliant with regulations, and also identify any underlying issues.
- Financing and negotiation through the help of mortgage brokers or lenders.
- Closing the deal which involves finalizing and transferring the ownership.
The main stakeholders you can expect to collaborate with in the process are:
- CRE brokers
- Property inspectors
- Real estate attorneys
- Underwriters
- Mortgage brokers and lenders
Challenges in Commercial Real Estate Investing
There’s no doubt that the realm of CRE is an exciting one but don’t let that blind you from the flip side of the coin.
Here are some of the most common challenges you might face:
- Volatility and uncertainty: The CRE market is heavily reliant on the economy, interest rates, and governmental factors. It’s important to conduct sufficient market research to stay prepared and ahead.
- Financing constraints: Securing funding can be more challenging for first-time investors. It’s important to maintain a good credit score and explore various options to find the one that’s best for you and your workflows.
- Market oversaturation: Depending on the niche markets you’re looking in, you might face more competition. This can make finding attractive investment opportunities tougher.
- Emerging trends: To stay ahead, you have to keep an ear to the ground. If you lose footing of emerging trends like CRE tech integrations and changing tenant preferences, you will get left behind.
Blooma Streamlines Commercial Real Estate Investment
We hope this guide has given you a captivating insight into the complex world of CRE investing. Now, more than ever, you’ll understand the importance of data-driven decision making in this field.
That’s where Blooma comes in.
Blooma offers a comprehensive suite of automation tools to streamline CRE investments. Our software solution comes with market research tools that provide powerful analytics and market insights to empower investors. You also get a proptech tech stack that supports advanced financial analyses, portfolio optimization, and more.
Blooma goes beyond other commercial real estate technology with intuitive risk assessment projections that help investors identify and prevent potential risks, helping make profitable but safeguarded choices. Blooma’s efficient deal management capabilities also streamlines the entire process from A to Z, simplifying the user experience.
Are you ready to own your CRE investment journey? Schedule a demo with us today!