Commercial Real Estate Investment – Basics

Commercial real estate investment is the natural progression from residential property investment. Experienced property investors tend to move into commercial real estate sooner than later – and for very good reasons.Once your portfolio grows you will find it very difficult to manage your investments if a large portion of them is tied in residential properties. Imagine if you have $15 million worth of residential properties. That will be a lot of homes and tenants to take care of.On the other hand $15 million will buy only a very small number of commercial properties that will be comparatively easy to manage with much lesser overheads look at this now.

Commercial properties include offices, industrial sheds, free standing retail shop, bulk retail, block of shops, medical centers, service stations, motels, hotels, back packers, health clubs, churches, funeral parlors, child care centers, car yards, convenience stores, shopping malls, to name just a few. Each type of commercial real estate investment has its own peculiarities, strengths, problems, rewards and risks.The return on investment in commercial real estate is much higher than residential property.The income is net and not gross because the tenant pays all the out going expenses. The income is also more stable because of the long leases.

It is typical to have returns of around 10% net for a commercial real estate investment and any where from 7% to 9% net return for a prime property.The value of a commercial real estate to a great extent is determined by the quality of the lease. In general the value is determined by taking net contractual rental being paid and use of a capitalization rate to arrive at a value. The value is also determined by the quality of the tenant and length of the lease.The value of a commercial property can drop substantially if it becomes vacant. I have seen commercial properties being sold at less than half their value if they are difficult to lease.