Successful commercial real estate investing strategies can change quickly. No matter how much experience you have in the industry, you need to find an approach that meets recent developments.
Are you prepared for the state of commercial real estate investing in 2022? Keep reading to learn how you can build a successful portfolio.
Popular Approaches to Commercial Real Estate Investing
You have numerous options for commercial real estate investing. The following four approaches stand out as popular opportunities for investors at different levels of experience. Whether you’re a seasoned professional or just getting started, one of these should work for you.
Core (Foundational)
Core investing strategies focus on buying the types of properties that tend to hold their values. It’s a low-risk approach that often appeals to people learning more about their commercial real estate investing options. By starting here, you can learn the process of buying and managing a commercial property without accepting too much risk.
Investing in core properties, such as Class A office buildings, can provide a steady rate of return. Often, though, you don’t get extraordinary returns that can help you build a small real estate empire. Plus, some of the properties cost a lot of money to purchase. Office buildings can easily cost millions of dollars. Even with low-interest funding and financial assistance from partners, that’s a lot of money.
If you have enough money for commercial real estate investing, this is a good place to start. It’s also a good option for generating passive income. That approach, however, will require hiring a management company, which cuts into your profits.
Pros:
Reliable revenue from long-term tenants.
Relatively low-risk.
Predictable ROIs.
Properties tend to hold their values.
Cons:
Not many opportunities to generate extraordinary returns.
Core Plus (Foundational Plus)
Core plus properties are very similar to core commercial real estate. The difference is that you can potentially increase your revenues and the property values by:
- Investing in remodels or other improvements.
- Improving management strategies to lower costs.
- Offering services that most Class A properties do not provide.
Since you will likely put more money into these properties after you buy them, they represent a slightly higher risk. Plus, you might need to keep some offices empty while a construction team improves them. When done correctly, though, you could improve the value dramatically and make the property much more appealing to tenants willing to spend money on spaces that meet their unique needs.
Pros:
Low to moderate risk.
Opportunities to increase revenues over time.
Flexibility that lets you attract and retain specific tenants.
Cons:
Slightly more expensive than the core strategy.
There is a risk that improvements will not yield higher returns.
Keeping spaces empty while you improve them means you miss revenue for a period.
Value-Added
Value-added properties don’t have many prospects when you buy them. Instead, you need to devote resources to improving the real estate to attract reliable tenants. You might think of this as a higher-stakes version of core-plus commercial real estate investing because you know that you must spend money improving the property.
Only experienced real estate investors should try to make money from value-added opportunities. Successful deals involve a lot of strategic planning and oversight.
There are several ways to add value to commercial real estate. Common options include:
- Upgrading utilities to support the tech needs of today’s businesses.
- Adding common areas where tenants can hold meetings, brainstorm, conduct reviews, and conduct other tasks.
- Building parking structures that make it easier for employees, clients, and customers to visit the property.
- Remodeling floor plans and offices to meet the needs of unique tenants.
If this approach to commercial real estate investing goes well, you could earn exceptional returns over a long period. It’s a riskier strategy that requires more knowledge and experience. When it works, though, it can generate exceptional revenues.
Pros:
Has the potential to generate high returns.
Lets you adapt existing buildings to meet the needs of current businesses.
Properties often sell at low prices because owners know the buyer will need to spend a lot on improvements.
Cons:
It’s a high-risk strategy that could lose a lot of money.
Requires a lot of capital to purchase and improve the property.
Success requires exceptional knowledge of commercial real estate investing.
Plan to spend a lot of time overseeing the project before you start making any money.
Opportunistic
Opportunistic commercial real estate investing is the riskiest option. Only attempt it if you have years of experience in the industry.
Many opportunistic real estate plans involve buying land and building new developments. For example, you might have data showing that a town’s growing population makes it a good location for a small office park. You would purchase the land, create plans for the buildings, construct the buildings, and seek tenants for your spaces.
As you might have noticed, it takes a group of people to plan and execute a successful opportunistic commercial real estate strategy. You need architects, surveyors, marketers, and many other professionals. You can outsource some of the necessary services, but you will always need a core group of knowledgeable investors.
Pros:
You can make a lot of money by developing new properties.
Undervalued land can sell at low prices.
You can customize your development to meet the needs of your target tenants.
Cons:
It often takes years to complete the project.
Expect it to take a very long time before you earn a profit on your investment.
Success depends on accurately predicting future needs.
Tips for Success in Commercial Real Estate Investing
Success in commercial real estate investing might seem like luck to people outside of the industry. Really, success usually comes from developing data-driven strategies. The following tips can’t ensure that you will succeed, but they will improve your chances of making money as a commercial real estate investor.
Set a Budget for Your Investment
Even in the worst times, it’s very unlikely that you will lose your whole investment when you buy commercial real estate. That isn’t true for many other investment options, including stocks and cryptocurrencies. Your property could potentially lose value, but it won’t become worthless.
That doesn’t mean you can invest all of your money into real estate, though. Commercial real estate investing means that you lose some financial liquidity. If you decide that you want to access the money you’ve invested in real estate, you need to sell the property. Finding a buyer willing to give you an acceptable price could take months or years.
Knowing this, it becomes important to set a budget that tells you how much you can afford to invest in real estate.
Remember that you can always commit more to commercial real estate investing in the future. Ideally, you will generate profits that you can invest in other ventures, giving you more diverse revenue streams that contribute to your financial success.
Know What ROI You Expect
Every investment involves risk. You take the risk because you want to reap the rewards. A smart strategy for commercial real estate investing will include the return on investment that you expect. When you know approximately how much money you will get in return, you can make better decisions about how much money to devote to investment opportunities.
Do you know how to calculate the cap rate of commercial property? Learn more by reading What Is a Good Cap Rate for Commercial Real Estate? It will help you make informed choices that lead to strong returns on your investments.
Keep Up With Commercial Real Estate Trends
You never know when a new real estate trend will change the industry. When the COVID-19 pandemic started, tenants suddenly wanted a different type of commercial space that kept employees separated And helped prevent the disease from spreading. Additionally, many tenants started looking for short-term leases that wouldn’t lock them into long commitments. With so much uncertainty, they wanted the option to move locations if necessary.
Trends that influence the success of your commercial real estate investing will vary by location. As more people move to suburbs and small cities, you might find that mixed-use developments become more popular while tall office buildings become unfavorable.
ProspectNow can help you track real estate trends by giving you data about specific areas. You can search areas by entering city names or zip codes. You can also draw an area on a map. The platform will give you information about all of the commercial properties inside the share you draw.
Save your searches so you can revisit them often to see how communities change over time.
Learn to Find Off-Market Properties
Learning how to find off-market commercial properties and apartments can give you a huge advantage over other real estate investors. Many property owners haven’t decided that they want to sell their commercial real estate. Despite their uncertainty, some of them will determine that it makes the most sense for them to sell, especially if doing so helps them avoid negative situations like foreclosures and lost revenue.
Imagine someone who owns a strip mall. They need to keep every space full to cover their expenses and earn profits. If they struggle to find long-term tenants, they might decide to cut their losses and sell the property to someone else.
Should you invest in commercial real estate that doesn’t work well for someone else? That depends on whether you think you can do a better job managing the property. Evaluate the building, past tenants, current tenants, and fair market value. You might discover that you can make the property much more successful.
ProspectNow can help you find off-market commercial real estate investing opportunities. The platform’s predictive analytics uses a combination of machine learning and artificial intelligence to find real estate likely to get listed within the next 12 months.
When you use ProspectNow’s predictive analytics, you also learn how likely a property is to sell soon. You might not decide to invest in the properties, but you can always use ProspectNow to generate a lead of potential commercial real estate investing opportunities. The sooner you approach the owner, the more likely it is that you could buy the property at a reduced price.
How ProspectNow Can Help With Commercial Real Estate Investing
ProspectNow has been helping investors find real estate opportunities since 2008. The data you find on ProspectNow costs a lot more on other platforms. By controlling your costs, you can increase profits without sacrificing the integrity of your data.
Would you like to see how ProspectNow can make your commercial real estate investing more successful? Sign up for a free trial now!