Investing in commercial real estate is an appealing venture for many. Smart investors can experience high returns on their investment and take advantage of various tax breaks. “After stocks and bonds, real estate is the third-largest asset class in the U.S and commercial real estate is estimated to be worth $16 trillion,” explains Shawna Wright-Smith, Crowdstreet. And “the economic environment is poised well for commercial real estate in 2021,” adds Paulina Likos, an investing reporter at US News & World Report. So, it is a great time to invest. However, the question many aspiring investors struggle with is how to get into commercial real estate. The potential benefits are there, but many struggle with taking that first step. How do you start out and get your foot in the door?
How to Get Into Commercial Real Estate 101
- Don’t Go It Alone – The first rule of commercial real estate investment is that you don’t have to go it alone. In fact, the most successful investors have trusted partners they rely on to identify good investment opportunities, negotiate favorable terms, and, ultimately, close the deal. These partners are known as commercial real estate brokers. A broker can help you find, negotiate, and buy the commercial property that is right for you. Typical services include:
- Site selection
- Analysis for Investment
- Strategic Planning
- Practice Acquisitions
- Market Analysis
- Market Surveys
- Timeline management
- Negotiation strategy
- Purchase negotiations
- Find Your Niche – “Many assume commercial properties are just the offices they work in,” says Wright-Smith. “But we all interact with commercial real estate every day, even if we don’t realize it. Your local grocery store, the apartment complex down the street, the warehouse where your Amazon packages are sorted—all these and more all fall under the CRE (commercial real estate) umbrella.” Each different type of property offers many different benefits. And while it can eventually be beneficial to diversify your investments, it is wise to start out in one specific area. Find your niche.
- Retail – strip malls, retail centers, banks, and restaurants
- Office – buildings with at least 75% of the interior space designed and finished as office space
- Multifamily – apartment complexes, high rise condominiums, and smaller multifamily unites
- Warehouse/Industrial – warehouses, distribution centers, and large manufacturing sites
- Hospitality – hotels and motels
- Healthcare – medical office buildings (MOBs), hospital campuses, office buildings, and retail space
“Both national and local market conditions affect each asset class differently,” explains Wright-Smith. “For example, the COVID-19 pandemic hit hospitality especially hard, but overall provided a boost to the industrial sector by driving up e-commerce sales.”
- Work Your Way Up – “Many commercial real estate investors start with single-family rentals,” explains Likos. “This is a great way to get your feet wet, learn more about real estate investing, and accumulate wealth before investing in other properties.” And while residential investment is different from commercial, building an investment foundation can be incredibly beneficial. It is estimated that well over 90 percent of commercial real estate investors get their start this way.
- Know the Risks – “Beginners should be aware of the investment risks involved with this real estate property type,” explains Likos. “Every investment carries with it some kind of risk, and commercial real estate is no different.” Every commercial real estate investment falls into one of four risk profiles.
- Core investments are the least risky, but there is never zero risk. These properties are generally in good condition (minimal renovations required), in a major market, in a desirable area, and with plenty of quality tenants.
- Core-plus investments are less reliable, but often offer a greater potential return than core investments.
- Value-add properties require some renovations, and have some management or operational problems. However, potential returns are high after some sprucing up.
- Opportunistic investments have the highest risk, but also the highest potential returns. These properties tend to require significant renovations or are new construction (built from the ground up).
“Each level is a bit like a step up on a ladder in terms of taking on more risk, and in theory, being compensated for that risk with a higher targeted return,” explains Wright-Smith. An experienced broker can help you better understand the risks of potential investments, as well as help you avoid common pitfalls.
- Understand the Tax Breaks – There are a couple key tax breaks that commercial real estate investors need to be aware of.
- Depreciation: “Since the value of real estate deteriorates over time, there is a tax code that allows commercial property owners to depreciate the value of the property and receive an annual income tax deduction,” explains Likos.
- 1031 Exchange: “When you sell an investment, you usually have to pay capital gains tax,” says Likos, “but a 1031 exchange allows real estate investors to hold off on capital gains tax when selling a property to provide more capital when buying another investment property.”
United Development Realty Can Help!
United Development Realty can help you break into real estate investment. We know how to navigate the market in Maryland. We know the landlords, the properties, the buyers and sellers, and have access to up-to-date market data, databases, and tools that track industry trends, vacancy rates, and comparable properties.
United Development Realty provides Real Estate Consulting and Landlord Representation services throughout Maryland to help investors, like you, make smart real estate investments that maximize your ROI. Our client-first approach to commercial real estate consulting ensures that your unique needs are met. We start with you: your vision, your objectives, your goals. Then, we assist you through a tailored package of services to locate a property that fits your vision.
Let us help you make a smart investment. Call our office (locations in Bethesda 240-221-1976 and Fells Point 410-522-1632) to get in touch with an experienced commercial broker today.
- Esajian, JD. “Commercial Real Estate Investing – How to Get Started.” FortuneBuilders, FortuneBuilders, 1 Apr. 2021, www.fortunebuilders.com/how-to-invest-in-commercial-real-estate-getting-started/.
- Likos, Paulina. “Adding Commercial Real Estate To Your Portfolio Requires Investor Due Diligence. Here’s What You Need To Know.” U.S. News & World Report, U.S. News & World Report, money.usnews.com/investing/real-estate-investments/articles/how-to-invest-in-commercial-real-estate.
- Wright-Smith, Shawna. “Commercial Real Estate 101.” CrowdStreet, https://www.crowdstreet.com/ie/commercial-real-estate-101.