How to Invest in Commercial Real Estate

Investing in commercial real estate (CRE), while sometimes riskier than investing in residential real estate, also reaps more benefits than its counterpart. However, knowing where to begin in the commercial real estate investing process is not always clearcut. This blog will cover what you need to know to get started and will provide more information on where to get reliable commercial real estate data. 

Types of Commercial Real Estate Investments

There are eight main types of commercial real estate:

1. Office: There are three classifications of office buildings: A, B, and C. Class A office buildings have the best location and construction. However, these ones tend to be more expensive than the others. Class B tend to be older buildings that might need some restoration but are in good areas with people of a slightly lower income than those around Class A CRE. Class C buildings need work construction-wise and aren’t in a great area. However, they offer potential of higher cash flow than the other classes.
2. Industrial: This type of real estate is used for manufacturing and warehouses. 
3. Retail: Stores and restaurants are located at this type of CRE.
4. Hospitality: This type of commercial real estate is used for hotels, whether they be full service, select service, limited service, budget, or extended stay hotels. It can also be used for businesses like spas, convention centers, and resorts. 
5. Multi-family: This is where you buy commercial property for residential use. While multi-family units consist of duplexes, condominiums, and apartments where people live, they are still technically commercial real estate. That’s because some sort of business transaction is taking place, whether it be tenants paying rent to a landlord or, in the case of standard condominiums, paying for the maintenance of areas that all tenants share.
6. Land: This type of CRE includes agricultural land, land where real estate in urban areas will be developed, or land no longer used for industrial or commercial purposes.
7. Special Purpose: Any type of CRE that doesn’t fit into one of the above categories would be considered special purpose CRE. You might find parking lots, amusement parks, theaters, and more on this type of real estate.
8. Mixed Use: This type of CRE is that which is used for a combination of any of the above-mentioned types of CRE. For example, a building with restaurants on the first floor and apartments on the other floors would be considered a mixed use property.

No matter which type of commercial real estate you are interested in investing in, you have to keep the same things in mind when making that investment. Whether you want to learn how to become a real estate investor or you already are one but want to improve your skills, our guide below will give you some tips when 

The How-to Guide for Investing in Commercial Real Estate

According to FortuneBuilders, a company dedicated to teaching about investing in real estate, there are five steps to getting started with CRE investing. They are:

1. Understand how commercial real estate is different. Some of the ways that CRE differs from residential real estate include:
   1. CRE tends to have longer leases. They can range from 1-10 years whereas residential leases typically range from month-to-month up to 1 year.
   2. CRE income depends on usable footage.
   3. The risks and rewards of CRE are typically higher.
   4. You usually need more money up front to invest in CRE.

Keeping these characteristics in mind and doing your research not only on the differences between CRE and residential real estate, but on the property, location, and tenant type will allow you to make a more informed decision when investing. Canyon Data gives you everything you need to know about a specific property with up-to-date information.

2. Analyze comparables. Before investing in a property, find out what you can about properties of the same size and style in the same area to see how much they sold for. A good rule of thumb is not to compare properties more or less than 10% of the square footage of the property you’re looking at.
3. Use the right success metric. How do you calculate if a commercial property is a good investment? FortuneBuilders recommend looking at three metrics when determining success:
   1. Net operating income measures your revenue minus your operating expenses, before taxes.
   2. Capitalization rate creates a ratio of your net operating income to your property asset value. This will give you an estimate of future cash flow.
   3. Cash on cash measures the rate of return on your CRE transactions.
4. Reserve cost contingencies. This means saving up money to cover unexpected expenses. You should shoot for saving 5-15% the amount of what you invest into the real estate.
5. Avoid common CRE investing mistakes. Some of the most common mistakes you should avoid when investing include:
   1. Improper Valuations: Make sure to take every detail into account before investing in real estate. You won’t get every detail with just any CRE database you use. You will only get it with Canyon Data, which is why it’s necessary for arriving at a proper valuation. 
   2. Financial Ignorance: Knowing the difference between commercial and residential real estate will help you better manage your money when it comes to investing in CRE.
   3. Neglecting Due Diligence: Pay attention to every detail about a property. Do your research before investing in it. Canyon Data is a good place to start. It is a CRE database that gives you reliable, up-to-date data to give you an accurate picture of a property’s value.
   4. Not Working With a Team: Whether it be someone to help you invest in real estate or someone to manage the property once you invest in it, working with a team will alleviate some of your burden.

Proper valuations are only as good as the data that informs them. Canyon Data can help you with overcoming the mistake of improper valuations. We provide you with all the data you need to make a smart decision when investing in CRE, making a subscription to this database essential for proper valuation.

How to Know if a Commercial Property Is a Good Investment

Whenever looking at commercial real estate for sale, turn to Canyon Data first. Our database is your solution for smart CRE investing. Our A.I. technology, combined with our proprietary process, human collaboration, and robotics, allows us to verify data and overcome the 40-50% data inaccuracy problem that normally comes with a CRE database. A Canyon Data subscription gives you reliable, accurate data to make sound investment decisions. Ready to start making more informed decisions with your CRE investments? Subscribe to Canyon Data today.