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Commercial Real Estate: The Basics

by Amy Lillard

Jun 13, 2007 - If you're ready to make the leap to commercial real estate, you're poised to make great money. That is, if you know what you're doing. In our continuing series, we examine the basics of buying commercial real estate, along with tips for the process.

Investing in commercial real estate can be a lucrative endeavor. There's the obvious: you build an income stream through monthly rental fees. But think about other ways that you stand to profit. Buying a commercial property, just like an individual home, builds equity. You have the ability to buy a property, build that equity, and then turn your properties around and profit on sales. Additionally, you can buy a commercial space, set up a business, and receive income from that.

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Commercial real estate investment at its simplest involves buying anything other than a single family home, including apartment complexes, office buildings, educational facilities, retail properties, manufacturing buildings, warehouses, and more. It can also encompass buying a vacant piece of land to build a commercial property, or an occupied piece of land with a business on the premises.

There are several other types of commercial real estate that deserve some additional discussion:

• Flex properties: Buildings made up of a mix of office and industrial space are called “flex” properties. If 50 percent or more of the building is office space, the property is called “office/flex”; if less than 50 percent is office, it's called “industrial/flex.” Some flex properties include specialty space for research and development or laboratories.
• Niche properties: An increasing number of investors are choosing niche property types, such as apartment complexes specifically for university students, age-restricted complexes for older residents, self-storage facilities, and office buildings that cater to specific tenants like doctors and healthcare organizations. 
• Infrastructure: Some investors look towards this area as a possible real estate investment. Currently, this type of investment is more commonly classified as a private equity investment. Social infrastructure include prisons, courts, hopsitals, municipal garages and buildings, and schools. Transportation infrastructure includes airports, rail stations, ports, toll roads, briges and tunnels.

To truly make commercial real estate purchases worthwhile, and bring in the additional income and equity that you desire, the best strategies involves expert advice and lots of research:

• Utilize commercial agents and property management firms to guide you through the process. Some fees may be involved, but your risk will be lessened and your benefits more.
• Research the area you're considering thoroughly. This is particularly important for apartment buildings. What is the average household income? What is the typical rate of vacancy? Your rate on return might be high at first glance, but if your population has high turnover or low rent expectations, you may get in trouble.
• Buying a building with businesses, or a shopping center? Analyze carefully how successful the tenants are. You don't want to end up with a vacant building after businesses go under.

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Read our additional articles in this series for guidance through the commercial real estate purchase process, including terms, types, methods for obtaining commercial loans, and more.

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