A commercial real estate portfolio can be very profitable. However, the path to fortune has many pitfalls. Here are some guidelines on making money.
Different Types
There is a tremendous variety in commercial real estate. Do your research before buying.
Multifamily
Usually, commercial multifamily is 5 units or larger. What’s great about multifamily compared to other types of commercial real estate is that it’s relatively easy to find tenants. As long as you keep the property in good condition, it should only take you a few months at the maximum to find a tenant.
Office
Office properties are grouped into 4 classes (A, B, C, and D). Offices in the central business district, or the heart of the city, will typically command the highest rates.
Industrial
These will vary a lot in size. There can be heavy manufacturing, which will require a lot of renovation in between tenants. On the opposite end, there is light assembly. Warehouses typically are considered industrial.
Retail.
These are where shops are located. Anchor tenants are larger tenants that are used to draw customers to the location. They are often given a discount. The size of a retail location can vary greatly. It can be a single location, from a strip mall to even a regional mall.
Hotels
Low-end brands include the Holiday Inn and Best Western. The high-end includes Marriot and Ritz Carlton. They differ on levels of service. You probably don’t want to manage a hotel. Fortunately, you can outsource management.
Different Segments
Core
This is the least risky class. They are stabilized, fully-leased and secure. Leases are often long-term to high credit tenants. The buildings are in highly desirable locations. Little to no improvements are needed. There is often little appreciation in value. It’s good for those who want capital preservation and plan on holding for a long period.
Value-add
There is an opportunity to increase cash flow over time by making improvements to the property. These include things such as physical improvements, leasing vacant space, or improving management.
Opportunistic
Opportunistic properties often need a lot of rehabilitation to reach their potential. Many times they are fully vacant. This is the riskiest asset class. There is the most profit potential but it’s also the most complicated.
Building a commercial real estate portfolio can be very profitable. Be aware of the various asset types and classes.