Never believe the late-night commercials that promise a sure-fire system for making an overnight fortune by telling you how to invest in commercial real estate. It’s an endeavor that requires patience, skill and knowledge. Commercial real estate is fundamentally different from investments like stocks and bonds. Investors in commercial real estate face a much longer time horizon before booking profits. They also must spend more time and effort on education, research and the management of day-to-day operations.
However, the rewards of commercial real estate are far greater than stocks, bonds and residential real estate. Stocks and bonds also have no intrinsic value. They are purchased solely for their predicted future value and are worth whatever the market decides. As a result, they can fall to $0. Commercial real estate has intrinsic value because it’s a physical asset. As a valuable, tangible and scarce resource, it rarely declines in value over time. In addition to appreciation, investors gain rental income.
For those who revel in business challenges, commercial real estate offers a fulfilling career option that pays handsomely. Commercial real estate gets in the blood of investors who love deal making.
It’s also a team sport.
Success in commercial real estate requires communication with commercial real estate professionals who understand the local market. Investors who get plugged into the community gain access to valuable information and knowledge. LCI Realty provides investors with the information and contacts they need to invest successfully in the Phoenix market. The company also offers extensive education for those new to commercial real estate. This education builds the skills and confidence that make a successful commercial real estate investor.
Are you interested in making big money in commercial real estate? If yes, read the primer below on investing in commercial real estate for beginners.
What Is Commercial Real Estate?
Economists define commercial real estate as property that is primarily used to generate a profit. Examples of excellent commercial real estate investments abound in Phoenix, such as the following:
- Office space.
- Medical space.
- Retail space.
- Industrial space.
- Hospitality.
- Multi-family.
- Shopping centers.
- Sports entertainment.
- Residential income.
How Much Profit Potential Does Commercial Real Estate Offer?
Commercial real estate annual returns average between 6 percent and 12 percent. By way of comparison, residential real estate averages 1 percent to 4 percent. Stocks averaged 10 percent over the past 100 years. Bonds averaged 5 percent to 6 percent.
Because Of Leverage, Commercial Real Estate Beats Stocks By A Mile
Looking at the raw annual returns, it would seem stocks and commercial real estate are in the same league. If that were really the case, investors would have little reason to bother with the added work of commercial real estate investing.
Stocks are much less complicated; however, it’s tough to beat the average in the stock market. But savvy commercial real estate investors in Phoenix routinely beat the market average because they find the right investments and make improvements that increase values and rents, all while using other people’s money.
Leverage magnifies returns far beyond anything possible in the stock market.
How Much Money Is Needed?
The average commercial real estate deal for new investors involves a 20 percent to 30 percent down payment. If an investor put $30,000 down on a $100,000 property and had a lackluster 10 percent return in the first year, the investor enjoys a gross gain of $10,000, or over 30 percent.
Were this investor to buy in a hot market and see a 15 percent return, he or she enjoys a $15,000 profit or 50 percent. Here’s where it gets interesting. Once established as a commercial real estate investor, it’s possible to increase your leverage because you have the financial assets and track record to get approved with lower down payment percentages.
At $20,000 down on a $100,000 property, a 10 percent annual return nets the investor 50 percent, while 15 percent nets 75 percent. At $10,000 down, a 10 percent gain doubles the investor’s money, while a 15 percent return nets the investor 150 percent.
Established commercial real estate investors with highly successful track records can make deals that are 100 percent with other people’s money.
Leverage Has A Downside
It’s worth noting that while leverage increases profits, it also magnifies losses. For this reason, it’s essential for real estate investors to protect themselves. Commercial properties are subject to the risk of a broad economic decline.
Because of this, investors must purchase commercial real estate through an LLC created for the purpose. Creditors can attach the assets of the LLC, but the investor’s personal property, such as home, vehicle and bank accounts, are safe.
How Do You Guard Against Losses?
By working with LCI Realty, you receive the education and support needed to make intelligent investment decisions and avoid overleveraging. Our professionals help at every step of the way, from property selection to value-added projects that achieve increases in rents and property value. Also, LCI Realty shows new real estate investors the importance of building a team. This team should consist of a commercial real estate broker, mortgage broker and accountant. An experienced real estate lawyer is indispensable.
Investors should never enter into a contract without legal advice. Investors should also understand how to legally protect personal assets from creditors.
What Are The Ways You Can Get Into Commercial Real Estate?
- REITs – They are like mutual funds for real estate. They are purchased on the stock market and pay very high dividends, often exceeding 10 percent. REITs generally specialize in a certain area. For example, a REIT may invest exclusively in shopping malls. While REITs are a great way to gain exposure to commercial real estate, they are still a stock market investment. As a result, investing in REITs cannot produce the huge gains possible from direct investment. However, REITs are safer and require only a little research and monitoring. They are also liquid and require no minimum investment.
- Limited partnership – Limited partnerships strike a balance between REITs and direct investment. In these arrangements, the general partner runs the day-to-day operations while the limited partners are passive investors. In exchange for investing their capital, limited partners receive a share of the rental income and a percentage of the profit when a sale closes. Most limited partnerships have between two and 10 limited partners.
- Direct investment – Direct investment is where big money becomes possible, but it is not a short-term endeavor. LCI Real Estate helps investors save time, determine an appropriate risk tolerance, and gain the knowledge needed to understand essentials like cash flow, taxation and financing.
Seven Tips For Successful Real Estate Investing
- Know the market.
- Stay within your risk tolerance.
- Consult an experienced real estate attorney.
- Listen to your tax consultant.
- Avoid overleveraging.
- Buy properties with LLCs.
- Select honest, competent partners like LCI Realty.
Commercial real estate provides incredible investment returns, but building a business that generates those huge returns takes many years. High profits also require savvy and intimate knowledge of the market.
LCI Realty provides clients with the education, guidance and market knowledge needed to succeed in Phoenix area commercial real estate.
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Thank you for telling me that I only need to secure about 20% up to 30% for the down payment as a new investor in commercial real estate. I’m looking for markets where I could invest my money and a friend suggested venturing into real estate. Since you wrote that I might be able to enjoy a gross gain that is higher than my down payment after the first year, I am more determined to study this market more.
Mesur, thanks for informing me that the average commercial real estate deal requires new investors a 20% to 30% down payment. My cousin and I are looking for a medical facility property for sale for our proposed business. I’ll share what you said with him so we can discuss the financial aspect and find a commercial real estate agent as soon as possible. Thanks again!
It’s great that you mentioned that success in commercial real estate requires communication. My brother wants to purchase a small building so that he can start a bike shop where he will sell bikes and also repair them as well. It seems like it would be a good idea for him to find a real estate agent that communicates well so that he can get a building for a good deal.