Commercial Real Estate Investing
Real estate investments are considered a great way to build wealth. Specifically, commercial real estate investing is recognized as offering some of the highest and dependable income streams and equity appreciation. So, what is the meaning of a “commercial real estate investment?”
Commercial real estate is referred to as a property that is leased out for office, warehouse, industrial, business or retail purposes. When a person invests in commercial real estate, it means the purchase or development of a property that has been planned with the intent of housing commercial tenants. It is different from investment in residential real estate, such as multifamily. In commercial real estate, the investor leases out and collects rent from the businesses that occupy space in their properties, instead of collecting it from residential tenants. Any raw land which is purchased for the development of the commercial property, as apposed to speculation, is also included in this scope of commercial real estate.
In 2020, much like other industries, the investment market will also face bigger challenges and proper due diligence, and analysis of other market forces, is essential. Investment in buildings which have smarter technologies, suitable locations and other associated attributes, can witness better returns for investors. This needs to be analyzed properly by a seasoned buyer before making any investment decision.
Office
Ranging from single-tenant offices to multi-tenant skyscrapers, office space is the most common type of real estate. They are defined by one of three categories: Class A (Newly built/extensively renovated buildings), Class B (Older buildings requiring capital investments), or Class C (Requiring redevelopment).
Retail
Retail buildings range from strip malls and community retail centers to banks and restaurants and are often located in urban areas.
Industrial
Offering spaces with height specifications and docking availability, industrial buildings are mainly referred to as manufacturing industries.
Special Purpose
Special purpose properties are planned for a specific use, to the extent that it becomes difficult to repurpose the property for another use. Examples: Car washes, self-storage facilities, schools, leisure, tourism industry, etc.
If you’ve been looking for investing in commercial real estate, MarketSpace Capital can assist you in getting started and making smarter, more educated investment decisions. MarketSpace Capital emphasizes on the ground-up developments, value add investments, and has historically made multiple investments in the commercial space. Consequently, MarketSpace Capital can assist in offering this expert advice in commercial real estate.
BENEFITS OF COMMERCIAL REAL ESTATE
The returns from investing in a commercial real estate can be very gratifying and can benefit you personally and financially. For many investors, the rationale of investing in commercial real estate is for future wealth and security. While for others, the objective might be to utilize it for tax benefits and investment portfolio diversification.
A commercial real estate investor can also take advantage of the following benefits:
The symbolic benefit and goal of investing in commercial real estate is an advanced and higher potential income. Generally speaking, commercial properties have a higher return on investment in comparison to similar investments in single-family, house properties. Another benefit of commercial leases is that they are generally longer term leases when compared with residential real estate. This results in far less tenant turnover to deal with in commercial real estate.
One of the distinct advantages of investing in commercial real estate is the consistency in the stream of income because of longer lease periods. This helps the investor in achieving economies of scale and multiply their income streams in an exponential manner. Other benefits associated with this triple net lease are that many tenants also pay for the building’s real estate taxes, property insurance and maintenance costs. This helps in increasing the economic benefits of the property owner.
Due to the apparent struggle of commercial investing, the commercial space tends to be less drenched with other investors. This helps the commercial real estate investor in entering into a less competitive market.
As in most real estate investing, the effects of non-cash items such as depreciation and amortization can be of great benefit to the commercial investor. As a result of such non-cash tax deductions, a large portion of the income is therefore, not categorized as taxable income.
Invest in Commercial Real Estate Around the Nation with MarketSpace Capital – Located in Texas
MarketSpace Capital, located in Houston, Texas, develops best-in-class commercial projects in some of the most attractive real estate markets in the United States.
MarketSpace and its senior leadership team are available to provide answers to the questions arising from many first time real estate investors such as “How do I make money on real estate?” MarketSpace Capital is there to help the investors in understanding the concepts of Cash on Cash Return, Internal Rate of Return, Equity Appreciation, Principal Pay Down, etc.
MarketSpace Capital can help you to take the next step of diving into the commercial real estate investment. Simply put, MarketSpace Capital is there to provide friendly guidance and help throughout the process of investing in commercial real estate.
Commercial Real Estate Terms You Should Know
If you are planning to invest in commercial real estate, there are terms you should understand. These terms are essential to understand on any property you are planning to purchase.
Net Operating Income
NOI = Rental Income – Expenses
The expenses do not include depreciation or mortgage payments but property expenses. NOI is essential to every commercial real estate deal you will ever evaluate. It determines the property value now and in the future, how your cash flow will be and how to make an offer. It is essential to understand if the NOI.
Cash on Cash Return, also known as the return on investment, which is the heart of your money or your investor’s money; it is your annual cash flow divided by your down payment. This term is essential since it is not how much you spend on a property but how fast your money is coming out of the property. It is not exciting to spend $ 50,000 and take 20 years to get your $50,000 through cash flow, which is only a 5% return. This may be okay for a stockbroker but not for commercial real estate, where we expect a double-digit minimum return.
Debt Coverage Ratio
This term is frequently used by lenders, which are at the heart of the commercial real estate and financing. It is the amount of cash flow available to pay for your mortgage. To obtain DCR, NOI is divided by your annual debt. Commercial lenders want you to pay the mortgage and have something left over; DCR tells you how much is left over. This is important since the lender will check the first number to see if your deal is lendable, at least 1.2 or more.
This term is essential in determining the worth of a property and what to offer when considering buying a property. It also varies on the neighborhood or the sub-market you are in. Price per Unit is usually used for apartments and is obtained by dividing the property price by the number of units. For example, if you have a $ 500,000 apartment building and have ten units, you get $50,000 per Unit. That is how to calculate the price per Unit.
This term is used in retail centers, industrial and office buildings. The price per Unit is divided by the square footage’s price to determine the price per square foot. Therefore, $500,000 is divided by 10 000 square feet to get $50/sqft, which is the price/square footage.
Class A Building: these are the newest, high quality at the best locations and high rents. Usually attract tenants of the highest quality. This is not good for beginners since the price is too high with low returns and high competition with institutional buyers and funds since they can pay all cask and are okay with low returns.
Class B Building: These buildings are usually older but still of good quality and attract mainly average working-class tenants. An actual commercial investor aims to look for a class B building in a class A neighborhood, then renovating the building to a class A rent.
Class C Building: this is the lowest classification; the buildings are older and need renovation. They attract lower-middle-income tenants since the rent is low. Class C is the best for an apartment investing for the ratio between the price per Unit and the rents are good and can get high returns. Managing these properties requires skill since they need lots of maintenance, the neighborhoods and tenants could be challenging.