Commercial real estate is a popular alternative investment for many investors. It’s no wonder with its high ROI and potential for growth. Many see it as a sufficient means of passive income that provides a sense of consistency unlike other types of real estate.
But before making any type of investment, here are a few things to know so you don’t end up making some common mistakes:
Know Your Types of Commercial Real Estate
Not all commercial real estate investments are created equal. There is a wide range of different types of assets. The top five categories for commercial real estate include:
- Special Purpose (a property that has limited ability to be used as anything other than its sole purpose)
However, other property types may not be as common but are still available as investment properties, such as:
- Self-storage Facilities
- Nursing Homes
Each of these properties has different circumstances that determine the overall value and expected return on investment.
Educate Yourself on the Market’s Supply and Demand
Just as every type of commercial real estate property is different, so is the market in which it exists. Your investment goes beyond just the property itself. Your investment is also within the actual location of where the property is. Perhaps you find that commercial real estate has a high ROI for a certain popular city.
Unfortunately, you may not have done enough research to discover a high supply and low demand for any new apartment buildings or retirement homes. Make sure to always do diligent research before diving into any type of investment.
Understand the Risks of Commercial Real Estate Investment
One primary example of a risk that happened over the last year occurred during the COVID-19 global pandemic. Default risk, a common type of risk in the commercial real estate industry, is when tenants fail to pay their monthly rent. This happened all over the country, with thousands of people losing their jobs, leaving them unable to pay rent.
This can happen with any type of major pandemic or economic crisis, such as the 2008 stock market crash. Tenants who fail to pay their monthly rent mean they may have to permanently shut their doors, which can create an incredibly high expense for the property owner.
It’s important for you to be fully aware of all of the risks that are involved with your investment. You can speak with a specialized property management company that can help you understand the risks and navigate all of these new, uncharted territories.
Have a Contingency Plan
As we mentioned, there are several risks involved with investing in commercial real estate. Having a contingency plan, such as a capital reserve fund, can give you peace of mind and a sense of security in case something does go wrong.
No matter how much research you conduct or how many experts you speak to, there are changes that can flip your investment completely upsidedown.
Putting aside extra funds for unexpected expenses, to increase rent, make renovations, or have a shift in management can make a significant difference in the outcome should something major happen.
Commercial real estate can have incredible returns if done correctly. The most important thing you can do is educate yourself and not be afraid to ask questions.
No matter what, making an investment means you are taking a chance, but it doesn’t mean it has to be an uneducated choice with a lack of strategy behind it.
Article Submitted By Community Writer