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Making money outside of your day job is a great way to boost your net worth, reach your financial goals, and fund your future retirement. But navigating the world of commercial real estate investments isn't easy. So before you jump in feet first, there are a few things you need to know ahead of time. Today, we're breaking down the best ways to generate passive real estate income and how to avoid common (and costly) mistakes.
When you think about it, owning real estate is considered by many to be part and parcel of the American Dream. If fact, the U.S. Declaration of Independence’s original draft featured the language, “…Life, Liberty and the Pursuit of Property'' until the last word was ultimately changed to “Happiness” by Thomas Jefferson. There’s nothing that compares to the pride and financial freedom that comes with owning your own property. Beyond that, investing in commercial real estate (CRE) can be a fantastic way to diversify your investment portfolio and earn passive income. But if you’re new to the world of CRE investing, knowing where to start can be confusing—or even downright daunting. Fortunately, Fountainhead Commercial is here to help. Here are three ways to invest in real estate from our experienced property investment advisors.
So, you want to invest in commercial real estate. That’s great! Commercial real estate has consistently produced better returns with a lower risk compared to many other types of investments. But investing in this type of real estate can be complex. Even if you’ve invested in residential properties before, this is a whole different ball game. And the larger price tags on most CRE properties can be intimidating. For the best results, you’ll want to work with a commercial property investment advisor. In today’s article, we’re breaking down everything you need to know about Denver investment properties.
Investing in commercial property can be a great way to build wealth and acquire a steady source of passive income. But for many people, commercial property is an intimidating type of investment to get involved with. And we get it – commercial real estate investing can appear complex. Today, we’re going to break this investment strategy down and provide helpful tips and tricks for getting started.
Types of commercial properties
Commercial properties typically fall into three main categories: office, industrial, and retail:
- Office - As you may have guessed, office property refers to real estate leased by professional service firms, administrative users, and other ‘white collar’ tenants. This includes highrise towers and skyscrapers in city settings to mid-rises and office parks in suburban areas. Office properties come in a wide range of sizes and styles offering investors many options to choose from depending on their investment goals. Office building leases often are firm commitments in the 5-year to 15-year range.
- Industrial - Industrial properties refer to real estate that’s used for e-commerce distribution, manufacturing, and other ‘blue-collar’ business operations. Most often, this includes buildings such as warehouses, distribution centers, product assembly factories, etc. Historically, industrial properties are located in outlying but logistically key areas that would be seen as undesirable for retail or residential properties. Leases for industrial properties typically last for 5-years to 20-years.
- Retail - Retail properties refer to spaces that are used by retail businesses to conduct business directly with the public. This could include clothing shops, restaurants, storefronts, strip malls, shopping malls, factory outlets, etc. Leases for retail properties tend to fall in the 3-10 year range.
How investing in commercial property generates returns
Your commercial real estate investment strategy will start with the acquisition of a property that either has an existing, rent-paying tenant in place already or a vacant property that is (or can be made) desirable to that market’s tenant-base. Through this purchase, you’ll generate a return on your investment in three ways: 1) by leasing the property and collecting rent from a tenant(s), 2) by taking advantage of property tax benefits (depreciation and interest payments write-offs), and 3) appreciation of the asset over time while the property is owned. Here’s a little more on how commercial real estate investing can generate returns.
Investing in CRE is a great way to acquire a steady stream of income due to the longer lease terms associated with commercial tenants, which often provide a corporate guaranty of lease payments. On average, commercial properties yield a 6-12% return on investment according to Fortune Builders.
The second - Depreciation: IRS acknowledges that for rental properties, natural wear and tear is a tangible factor that impacts the overall value of the property. Depreciation is a tax benefit that allows commercial real estate owners to recover the cost of maintaining their income-producing properties but always consult with your accountant who focuses on real estate tax laws.
In addition, property mortgage interest deduction provides excellent tax benefits. This deduction helps investors own property while it appreciates and enjoy a positive cash flow with lower tax liability.
Appreciation and value-add
The third—but equally as important—way to gain returns on your investment is through the increase in the property’s value, or appreciation, throughout your period of ownership. For an investor that has a larger appetite for risk, value-add properties can generate very strong yields. To identify potential targets, you’ll want to look for buildings that:
- Have higher vacancy;
- Need cosmetic renovations;
- Have deferred maintenance issues;
- Have functional obsolescence;
- Or have the opportunity for significant exterior or landscaping improvement;
- Commercial real estate investment strategies
At its core, commercial real estate investment is about acquiring an existing or potential, durable income stream while also identifying demand for a particular product type (e.g. office, industrial, retail) or particular tenancy (e.g. ‘essential’ business) in a given submarket/city and purchasing property while supply is limited. Checking all of these boxes can be complicated. To ensure you get the best return on your investment, based upon your unique risk vs reward tolerance, you need a sound investing strategy. Some examples of common commercial real estate investment strategies include:
- Lowest risk – STNL Cash-Flow MOB: Identify a medical office building fully-leased to a single national credit-rated tenant (with corporate guaranty) that is committed on a longer-term NNN lease of 10+ years in a larger urban area.
- Lower-to-moderate risk – Multi-Tenant Light Industrial; Target a light industrial/flex (part office & part warehouse) that is 85%+ leased to local and regional-credit tenants with existing lease terms of 2-5 years remaining in proven submarkets.
- Moderate risk – Office Building for Renovation: If you identify an office in an established suburban submarket with older common area finishes, outdated suite features, smaller suite sizes, and moderate vacancy, purchase the building and renovate the vacant suites & common area finishes so you can increase rental rates and achieve overall appreciation after fully stabilized.
- Higher risk – Industrial Property for Redevelopment: Identify a distressed submarket that has opportunity for economic resurgence over the next few years. Then purchase an industrial property with a shorter-term commercial tenant in place. In the long term, plan to have the property up-zoned and redeveloped into retail, office, or mixed-use real estate as the neighborhood begins booming.
- Highest risk – Land for Entitlement then Develop: Target a land parcel that has virtually no development but is ripe for population and economic growth in the coming years. Then acquire the properly-zoned land, obtain the necessary permits, and develop the land after forming joint venture with a proven contractor.
Learn more about investing in commercial property with Fountainhead Commercial
If you’re interested in learning more about investing in commercial property, reach out to us at Fountainhead Commercial. We are your one-stop-shop for all of your commercial real estate needs. We take pride in ensuring every client we work with is buying, selling, or exchanging their real estate at the right time, to the right entity, and at the right price.
Contact us today to learn more about commercial property investments.
Investing in real estate has proven to be a great way to build wealth. Commercial real estate (CRE) investments, in particular, can provide consistent streams of income compared to residential real estate properties. If you’re interested in commercial real estate investment opportunities in Denver or elsewhere in Colorado, you’ve come to the right place. We’ve put together a comprehensive guide of need-to-know tips for commercial real estate investing in the metro area as well as statewide.
A repeat client, who has spent several years in the commercial investment space, came to CCIM-designated buyer representative, Lowrey Burnett, when the investor was ready to expand his commercial real estate portfolio. He had specific investment return criteria and was prepared to scour the country for the right, positive cash flow commercial property.
This search for an investment property came with unique criteria to ensure the new asset would align with the investor’s overall investment strategy. The buyer wanted a well-located, fully-leased, single-tenant asset that would support definitive investment yield requirements. There were high expectations for this investment property and Burnett was up for the challenge.
He identified several best-in-class investment options in various states and the client selected an ideal property in Florida. Burnett tackled the due diligence, negotiation and closing process head on.
One of the many suitable options Burnett proposed to the client as a buyer's representative was an industrial distribution warehouse in a highly sought-after submarket that not only met the buyer’s investment yield requirement but also had a long-term, national-credit, single-tenant lease in place. The location provided tremendous access to the Interstate system which will always be desirable for companies and tenants that value a logistical competitive advantage. The next step was to ensure that the buyer’s purchase offer was the most attractive in a highly-competitive market.
Our client successfully closed on the investment acquisition of the 60,650 square foot industrial property that is 100% leased to the largest tire distributor in the United States. This industrial property met and, in some cases, exceeded the client’s expectations and continues to perform as a strong cash flow investment.
Burnett, a Certified Commercial Investment Member (CCIM), acted as the buyer representative for the investment acquisition of a Pensacola, Florida industrial distribution warehouse that was 100% leased to a national-credit tenant.
If you want to expand your commercial real estate investment portfolio and are looking for a trusted, experienced buyer's representative to lead the search for and acquire a high-performing asset in Colorado or anywhere in the United States, contact the buyer representative at Fountainhead Commercial today.