How to Invest in Commercial Real Estate 101

“The appeal of investing in this property type is multifold,” explains Paulina Likos, an investing reporter at US News & World Report. “Investors can generate higher investment returns and take advantage of tax benefits.” But you already know WHY to invest in commercial real estate. What you want to know is HOW to invest in commercial real estate. Well, we’ve got you covered.

How to Invest in Commercial Real Estate 101

“The economic environment is poised well for commercial real estate in 2021,” writes Likos. So, if you’ve been considering getting into the world of commercial real estate investment, now’s your time!

Understand Your Options

Before getting into the mechanics of how to invest in commercial real estate, it’s important to understand your options. There are basically six types of commercial real estate available.

• The three general classifications for commercial office space are Grade A, Grade B, and Grade C based on criteria such as age, location, maintenance, and length of lease.
  • Grade A office buildings are usually brand new or recently redeveloped or renovated and in prime locations or major cities. Grade A offices also feature state-of-the-art facilities and high-quality furnishings.
  • Grade B office buildings are typically well-maintained and finished to a good or fair standard, including adequate facilities. Grade B offices are typically found in the suburbs or slightly cheaper areas.
  • Grade C office buildings are typically 15-25 years old, functional with steady occupancy, and available for low rent.
• Retail space includes strip malls and retail centers, as well as banks and restaurants. “The size of these real estate properties can extend anywhere from 5,000 square feet to 350,000 square feet,” explains JD Esajian, Fortune Builders.
• Typically geared towards manufacturing industries, industrial space, such as warehouses and large manufacturing sites, are characterized by height specifications and docking availability.
• “Multifamily properties are comprised of apartment complexes, high-rise condominium units, and smaller multifamily units,” explains Esajian. “Property is qualified as multifamily real estate any time it has more than one unit, but can also be considered a commercial property if it has more than four units.”
• Healthcare real estate is a niche market with complex regulations. However, purchasing medical realty remains an excellent option for real estate investors. 
• Then there are special purpose properties, which include car washes, self-storage facilities, schools, hotels, etc.

Understand the 2021 Trends

“While the pandemic isn’t over yet, commercial real estate is expected to follow a broader economic recovery trend in 2021,” explains Esajian.

• As more and more consumers shop online, experts predict there will be up to 25% fewer retail stores by 2025. 
• While the pandemic saw a shift in the way people work – relying more heavily on telework arrangements, offices are expected to stabilize by the end of 2021, with an estimated 85.7 percent of companies returning to the office.
• The COVID 19 pandemic has not been kind to the hotel industry,with experts predicting that most hotels will not financially recover until 2023.
• Real estate experts predict an additional demand of 250 million square feet for warehouse space in 2021.
• Despite the struggles of the pandemic, the demand for housing has not decreased. Thus, with historically low interest rates and more attainable prices, apartments are expected to remain stable in 2021.

Understand the Risks

“Real estate as an asset class can be a rewarding investment. But 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.” Understanding these risks can help you better determine whether or not commercial real estate investment is right for you right now.

One way to minimize your risk is to understand the importance of long-term contractual leases. These types of arrangements provide the certainty of fixed income that creates a higher valuation in the marketplace.

Understanding the Tax Breaks

There are a couple of key tax breaks that commercial real estate investors need to be aware of.

1. 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.
2. 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.”

Work Your Way Up

Many commercial real estate investors start with single-family rentals. This is a great way to get your feet wet, learn more about real estate investing, and accumulate wealth before investing in other properties. Some experts estimate that well over 90 percent of commercial real estate investors start out this way.

“While investing in residential real estate is much different than investing in commercial property, building a foundation in residential real estate can prepare you for commercial property investments,” explains Likos.

You Need a Commercial Real Estate Broker

There are plenty of commercial properties on the market throughout Maryland, but which one is right for you? You can either use your precious time to scour the internet for options or you can hire an experienced commercial real estate broker. Partnering with the right broker can make all the difference. It is the broker’s job to show you multiple properties that fit your needs and help you compare them to find the perfect fit.

Typical services include:

Commercial brokers know how to navigate commercial real estate properties in Maryland. They know 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. 

Now That You Know How to Invest in Commercial Real Estate, What’s Next?

Contact United Development Realty to get started! We provide Commercial Real Estate Consulting and Tenant Representation Services throughout Maryland. We will help you find, negotiate, and purchase the commercial space that is right for you. We begin this process by listening to your vision, your objectives, and your goals. Then, once we fully understand your unique needs, we can assist you through a tailored package of services to locate a property that fits your vision. We are able to tap into our extensive network of property owners and developers to match your requirements with the ideal space.

Please call our office (locations in Bethesda 240-221-1976 and Fells Point 410-522-1632) to get in touch with a licensed broker today.

Sources

1. 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/.
2. 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.