Commercial Real Estate Investment 101

June 21, 2021

real estate investing

Commercial real estate encompasses multiple property types including retail, office, industrial, multi-family and special use properties such as storage facilities and hotels. You may also see the term mixed-use which refers to a property with a mix of different uses such as first floor retail with apartments on the upper floors. 

What is an investment property?

Investment property is real estate that is purchased as a means to generate income most commonly by the rent paid by tenants. Other times a property may be purchased with long-term goals in mind. For instance, a property that has a significant amount of vacancies that need to be filled to make it profitable is referred to as a value add investment. These properties are purchased with the intent to build value over time by filling vacancies and then either maintaining the property or selling it for a profit

Why invest in commercial real estate? 

One of the biggest draws to commercial real estate investment is long-term leases. Commercial leases tend to run for multiple years rather than the one-year term typically seen in residential rentals. But several variables affect commercial real estate investment such as location and timing, percentage of occupancy, terms and conditions of the leases, creditworthiness of tenants, guarantors, and more.

How to evaluate a commercial real estate investment.

There are several factors used when evaluating commercial property investment; namely net operating income, capitalization rate, and cash flow or cash on cash return.

Net Operating Income is the revenue minus the operating expenses. Operating expenses can include items such as insurance, property management fees, landscaping, snow removal services.  

What is CAP Rate? Capitalization rate, which is often referenced as CAP rate is obtained by dividing the net operating income by the sales price. The CAP rate is the expected return the investment property will make. What is a good CAP rate? The higher the CAP rate the better. 

Cash Flow or Cash on Cash Return is net operating income divided by the total cash investment. 

What is the best type of property to invest in? 

The best option will always depend on the investors’ objectives and current market trends. With all the intricacies involved in commercial real estate investment, it may seem daunting and overwhelming to start the process. Luckily there are commercial real estate brokers that specialize in investment properties.  They can guide you through the process of choosing a property type that matches your investment goals and desired level of involvement.

How to find commercial real estate investment properties? 

Working with a commercial real estate broker to find commercial properties puts an investor in a great position. Commercial brokers utilize their networks, industry tools and often know of properties that have not yet hit the market giving the investor an advantage when locating an investment property.

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