Real estate has always been and will remain the most preferred and reliable investment vehicle for investors looking for long-term ways to invest their money. According to a recent survey, 50% of investors prefer real estate investment. This sentiment is largely driven by the stability of this asset class and sustained growth over the years.
While real estate can broadly be categorized into 4 types, and is one of the very restricted and promising sectors, commercial real estate (CRE) is now democratized through various investment models. Here are the key models and factors to remember before you set foot.
Partial ownership It can be called as a formal setting where groups of investors gather money to buy a property. They share passive ownership of a high-value asset. This approach reduces the financial burden on a single investor of owning a property and allows the investor to earn returns on the investment. This investment can also be made through a brokerage platform that does all the due diligence and scouts for first class properties, which reduces the overall risk associated and gives a clearer picture of the expected returns.
The investment made through fractional ownership is directly under the control of the investor and generally leads to higher returns.
Real estate investment funds They can be called real estate investment funds. In REITs, an investor can invest a fixed amount which is then allocated proportionately among various prefabricated properties. The main advantage of this model is that it is available for a few thousand, which makes it affordable for most investors. However, an important factor to remember is that the investor has no control over the investment, which can remain idle due to various factors that would result in low returns.
Having understood the investment models, it is also necessary to look at the various factors while venturing into any new asset class.
Learn how to think like a pro if you want to succeed in commercial real estate. Note that commercial and residential properties are valued differently. Keep in mind that commercial property leases are generally longer than those for single-family homes, which results in a larger cash flow. Keeping primary market and industry research on hand can greatly aid in making the perfect decision.
The performance of your assets is greatly affected by their location. Both residential and commercial properties are subject to this.
When evaluating a potential commercial real estate investment, many factors related to location must be considered, such as access to assets, zoning, and other site-related difficulties.
The number of facilities, elevators, lobbies, ceiling heights, and similar features can describe the quality of an asset.
Developers use classes like A, B+, or B to describe the asset. Investment returns are better when the quality of your assets is top notch.
Your return will be more consistent the longer the tenant stays. This depends on the vacancy rate in the area. Expressed as a percentage, the vacancy rate compares the amount of time a property can be rented with the amount of time the property has actually been rented, generally over a one-year period. Tenants tend to look for other rental properties in areas where vacancy rates are less than 4-5 percent. Investing in a property in this location will also guarantee stable rents and progressive capital growth.
CRE lease structures are different from residential lease structures. It can be set up with rent increase every four years and 4 + 4 + 4 years (12 years) structure. While the landlord cannot ask the tenant to leave during the tenancy, they are free to do so at any moment. In addition, there will be a lock-up period. Obviously, the investor benefits more from a longer lock-up period.
Building your CRE portfolio? Remember these tips
- Real estate investing is only profitable in the long run
- Customize your investment based on the market, as each need has its own unique proposition
- Think seriously about the claimed expected internal rate of return, including vacancy and market rent rate
Finally, when choosing to invest in CRE, remember that buying commercial real estate only pays off in the long run, and it’s always a good idea to diversify your portfolio and invest in multiple assets. What may apply to the residential real estate market may not apply to commercial real estate.
The opinions expressed above are those of the author.
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