How to Make Money on Commercial Real Estate
Once you understand commercial real estate as an investment option, you can earn good returns on your investment.
The trick, of course, is knowing how commercial real estate works. In particular, you need to understand where your income comes from and what your options are.
Here’s how to make money on commercial real estate.
One of the easiest ways to earn an income through a commercial property is through rent.
The tenant (and the rate you set for that tenant) depends on the type of building that you own. Most people are familiar with renting a residential apartment, but there are several other types of lease agreements a landlord might use.
Here are a few common buildings and the tenants you might get in each of them:
· Multifamily real estate: can include apartments, townhouses, condominiums, and mixed-use properties. Leases are typically short-term.
· Office buildings: usually includes office spaces (individual offices and cubicles) and parking decks. Leases usually run five to ten years.
· Retail property: usually houses retail companies and stores. Leases run five years or more.
· Industrial property: smokestacks, warehouses, and similar properties. Leases are usually five years or more.
Since a company is responsible for paying rent in offices, retail buildings and industrial properties, the rent amounts are higher and the leases are longer. Commercial properties with a parking deck can also make a profit on parking fees.
This is good news for you as an investor, since you don’t have to look for new tenants as often. You are, however, subject to the ebbs and flows of the economy.
Another popular way to make money off a commercial property is appreciation, or the increase in the value of an asset over time.
Basically, you invest in a property, wait for it to grow in value, and sell it to make money off the rising property value. This depends on the demand for the property. Real estate is a uniquely scarce asset since it’s impossible to conjure more land out of thin air–especially in large cities.
If an area experiences a spike in demand, either because new businesses are moving into the area or because of a rise in tourism, property in that area is in higher demand. Scarcity drives up the value of the property and a savvy investor can make a profit.
There are two downsides to this approach.
First, unlike rental income, you only make money off appreciation once you make the sale. You might be able to raise rental rates over time, but the big profit comes from selling a property that has significantly risen in value.
Second, this tactic is heavily dependent on the whims of the economy. Properties can lose value if the economy takes a dive or if the neighborhood takes a downturn. Not even the most disciplined investor can guarantee returns when gambling with unpredictable outside factors.
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