Commercial Real Estate

Commercial real estate can be a very profitable investment but is generally not suitable for small investors. To invest successfully in commercial real estate you need to known how to manage this type of real estate in a good way. Commercial real estate also generally require larger investments than residential income. I usually recommend that people chose to invest in residential income instead.

If you want to invest in commercial real estate then you can do so but you have to expect a step learning curve. This is especially true if you buy commercial real estate that is empty and in need of renovation. There is nothing to say that you will not be successfully and there is plenty of new investors that successfully enter the market each year. If you do enter you must be ready to learn and do what is necessary to be successful. If you do then there is a lot of money to be made in commercial real estate.

Location, Location, Location

Location is always very important when you invest in real estate. This is true regardless of whether you invest in commercial or residential real estate. An attractive location will always be worth more and bring larger profits than a less attractive location. The location is however even more important when it comes to commercial real estate than it is for residential real estate. A tenant can chose to live a little of the beaten track. Especially if they get a lower price. Some people even prefer to live in a less ideal location. Commercial tenants do not have this luxury. They need to be where the customers is. They can not establish themselves in a location where there is no customers. This is true regardless of the rent you charge. Commercial real estate need to be in a location with a lot of traffic (car or pedestrian) to be able to attract commercial tenants. Poor locations will be hard to rent out and you risk that any business that do rent them en up going out of business due to the poor location.

Each client have their own needs

All residential clients have the same or similar needs. They need a kitchen, a bathroom and bedrooms. Commercial clients have needs that are a lot more diverse depending on what type of business they are going to run out of the property. Someone who wants to sell cars need something completely different then a grocer or a specialty store. People selling different types of service will need yet other types of properties.

There are two main ways to deal with this. The most common way to deal with it and my personal preference is to specialize in one type of commercial properties. This allows you to become an expert in your field and to get a large market share. It also allows you to find better deals as you will know exactly how much you can get out of a property.

The other option is to buy properties and renovate them to suit the clients that want to rent the property in exchange for long term contracts. This method can also be very profitable but can be very risky, especially when you get started, as you can take a large hit if a tenant goes bankrupt after you spent a lot of money renovating a property to their specs.

Higher risk, larger down payment

It is common that banks require a larger down payment if you want to buy a commercial property than what they do if you want to by a residential property. This is due to a number of reasons and is not always the case. It depends on the property, the location and what type of commercial use it is designed for. When you first start investing in commercial property you should expect to need a larger down payment than you would need if you got started in residential real estate. It can often be a good idea to get started in residential real estate and then gradually switch over to commercial real estate.