We all know that real estate is a great way to diversify your investments and reduce your exposure to the stock and bond markets, yet commercial real estate investing is rarely discussed when it comes to this topic. Commercial real estate investing may not have the benefits of reality shows touting it like its residential sibling, but it does offer a variety of very attractive aspects to the diversifying investor.
If you invest in a house to renovate or even rent, you are putting all your eggs in one basket. If that house can’t sell, you can’t fill it with a tenant, or worse, you have a fighting tenant who refuses to leave or pay rent, you’re in a world of trouble. The mortgage, upkeep, and upkeep costs of that house will bleed you dry. On the other hand, if you take the same money and invest in a ten-unit apartment complex, you would be spreading your risk among ten tenants. No one tenant could decide your financial success, and unless there is a full-scale revolt among all the tenants, you will be able to weather any storm.
Business investing also has the added benefit of being valued differently. When assigning a valuation to a commercial property, you do so based on the income it brings to you. When deciding on the same figure for a residential property, you have to trust the market and what comparable sales are doing. Therefore, if there are a glut of homes like yours on the market, or if motivated sellers have had to accept lower prices, your home will be worth less. The value of commercial property can be increased by increasing the income that the property provides. Cosmetic improvements and other changes that would allow you to increase rents are the most common way to increase income and valuation. Since net income is a function of income minus expenses, you might as well cut costs to increase your income. By reducing or passing maintenance costs on to tenants, you can increase bottom line income and increase property valuation.
If you’re convinced to invest in commercial real estate, you need to do your homework just like any other type of investment. Talk to real estate agents, double check what rentals the market is offering, and get a firm understanding of the cash flows of whatever property you’re looking at. Sometimes the numbers can be skewed to make the property’s outlook more optimistic than it actually is. Make sure you are dealing with real numbers and not estimates.
If you are new to real estate but want to get involved in commercial real estate investing, being a silent partner or part of an investment group may be for you. Allowing those who know what they are doing to manage your money, or a pool of money you have contributed to, is a great way to reap the benefits of commercial real estate. Real estate investment trusts (REITs) also offer exposure to the commercial real estate market through the creation of a real estate mutual fund.