Real estate investment has been a sound way to invest money into an asset that maintains and, hopefully, increases in value over time. With the historical performance of the market, low interest rates and uncertainty, real estate investment properties have seen a marked growth and resurgence in the last few years, especially commercial investment properties. It is very interesting that the more we talk with people about real estate, the more we understand how few are aware that they could be involved in an investment property purchase.
Commercial properties are everything that
residential ones are not. They usually consist
of shopping centers, office buildings, industrial
properties, and freestanding, income-producing
properties. In the past 20 years, the commercial
real estate industry has continued to respond
to consumer demand and evolve: Shopping malls have become lifestyle centers. Traditional grocery-anchored centers have become medical complexes. As with many other things in our economy and lives, it is a constant evolution limited only by space, demand, creativity or finances.
Most people don’t believe they could ever be part of the ownership of a commercial real estate property, or that they have enough money. Remember, it’s buying the property, not the business that we’re talking about.
Considerations For Investors
Following are some thoughts and pointers to give you something to think about that may change your mind about being a commercial real estate investor:
- Investment Groups: Investment groups are seeing resurgence for smaller assets in the past few years.
Historically, REITs (Real Estate Investment Trusts) dominated the commercial real estate arena purchasing large properties and large portfolios of properties. With the economy shifts over the last decade, smaller groups purchasing smaller properties have become a concerted movement. Some groups may be as few as two to five people, and some are larger. Investment properties can range in price from $20,000 to $20 million. The opportunities are only limited by the ability to put those groups together to purchase properties.
- Value: Commercial properties generate value both with comparisons in the market, and with the income stream generated by the property. In easy terms, the rent and income that the property generates helps create its value. The building(s) and assets also play a part, but income is a major point on this. »Rate of Return: This varies depending upon the purchase price, debt service and operating expenses. With most interest rates hovering between 1 to 2 percent, an investment that can yield 4 to 10 percent sounds too good to be true. But, the reality is that it’s very possible and achievable. A little research, good financing and purchase of the right property will not only net income along the way, but potentially a nice profit upon selling the property in the future.
- Financing: Commercial properties tend to have higher down payment requirements, say 20 percent or more of the purchase price. Obviously the income stream should cover the mortgage and all operating costs with the goal to be in excess of those numbers. Non-recourse loans (no personal guarantee) are preferable for obvious reasons but generally there is a requirement for a higher down payment in this financing scenario.
- Tenancy: Is there a tenant? What kind of lease agreement is in place? How long is the term and what kind of rents are they paying?
- Maintenance Costs: What kind of costs does the property generate? Who is paying for them – ownership or the tenant(s)?
- Management: Who is going to manage the property and handle paying the bills, banking, repairs, budgets, etc.? This usually is driven by the knowledge of the ownership, the type of property and the complexity of the asset. Management companies usually can perform as much or as little as an owner needs or wants. As with any venture that you start on, the most important thing you can do is research so you can make well-informed decisions. Don’t be afraid to ask questions; you might be surprised at what other people know. Ask around for a commercial real estate firm that is established, well-known and held in high regard. Brevard County has a number of well-reputed full-service firms that handle third party, investment and owner properties. These firms perform a number of services included but not limited to: Brokerage services, Property Management, Construction Management, Asset Management, Dispositions, Receiverships, Accounting and other services.
There’s a whole new world of investment opportunities for the right people, so do your research and set aside time to think about joining the world of commercial real estate investments.