Commercial real estate diversification is in the back of every residential investor's mind. Whether you're looking to diversify or just tired of managing residential tenants, investing in commercial real estate might be a good strategy for you. An impending economic downturn is also a good reason to explore certain types of commercial real estate because they may be more resilient than other types of properties.
Making the transition from residential investing to commercial real estate investing can feel overwhelming, but it doesn’t have to be. Learn about what types of commercial real estate might be a good fit for you and how to finance them.
Depending on the market conditions, there are a range of different commercial real estate investing options, including:
Commercial real estate investing can be lucrative, but it comes with some risk. Follow these tips as you start to test the waters.
If you’re used to investing in residential real estate, it’s important to know how commercial real estate is different. Leases last longer, often take a larger up-front investment, and it may take longer to fill a vacant space.
Choose investments that are expected to perform well in the future. Although conditions will change, unless you have the capital to withstand long-term vacancies, it’s important to be mindful of current and future market demand.
Every type of real estate performs differently depending on its location. A strip mall might thrive in one neighborhood and fail in another simply because of traffic patterns. Thoroughly research any property you’re considering and evaluate how the location might influence success.
Just as you would with residential real estate, you need to understand the value of similar properties to know whether you’re making a wise investment. Find out the value of similar properties that are selling and leasing.
Understand the costs to maintain the property and what a commercial lease requires of the owner. Budget for repairs and maintenance and include a contingency fund for unexpected costs. Make sure your property can be cash flow positive when you need it to be.
Unlike a traditional mortgage, getting a commercial real estate loan from a bank is not always easy, especially if you don’t plan to use the property for your own business or if it’s vacant. However, many investors are interested in buying discounted properties or those that are not performing, vacant, or generating below-market rents because they will be cheaper and have a higher upside once fully leased.
The value of commercial real estate hinges heavily on both income and location. Banks underwrite these properties and loans using debt service coverage ratios. These numbers will not meet bank requirements if the properties are below market or vacant, which is where hard money comes into play.
If you find it difficult to get a commercial real estate loan from a conventional bank, a hard money lender is often a good alternative. Underwriting is simple and focuses primarily on the equity of the property.
Hard money might even be your first choice if you’re searching in a competitive market and need fast cash to make an offer. Hard money lenders don’t require the same in-depth financial analysis that conventional banks do. This means less paperwork for you and less scrutiny of your finances. Hard money loans also use property for collateral, so as long as you have equity and a good deal, you have a good chance of getting a hard money loan. The speed at which hard money can close is especially useful for investors who want to take advantage of time-sensitive opportunities. Closing in five days or less is common with private capital.
If you’re considering commercial real estate investing, even as a first-time investor, Socotra Capital is an ideal hard money lending partner. You get fast access to cash—in as few as five days with our Turbo Close—and have more freedom to find the deals with the best upside. When you’re evaluating your lending options, keep hard money on the table for the most flexibility.
Seasons change, and so do investment opportunities. Read The Ultimate Guide to Navigating the Real Estate Market in Any Economic Season to learn how to decide which types of investment make sense at different times.