Commercial real estate is where businesses are conducted. It includes office buildings, apartment complexes, shopping centers, warehouses, industrial parks, hotels, motors, resorts, and so on. By holding commercial real estate, investors can receive a stable cash flow every month as well as the benefits from the increase in value of the property every year.
Compared to investing in residential real estate; to invest in commercial real estate is a bit more complicated. Different commercial real estate has different characteristics, and it requires different investment strategy. Some buildings require longer investment period and more capital investment. They are usually riskier than others. For example, office buildings require 5-10 year holding period while hotels require often more than 20 years. It is often required more capital to build a hotel than to build a warehouse as a hotel’s FF & E costs are very high. The value of the commercial real estate is also subject to urban planning policy. Buildings in the new CBD are expected to appreciate more than those in the old city center.
Commercial property investors are among the highest paid professionals, there is no reason not to think about owning your own commercial properties. Before start to look for commercial real estate, you have to take several things to consideration.
What type of investor am I?
There are two basic types of commercial real estate investors. The cash-flow investor and the long-term hold investor. Both can do well in building wealth, what you need to do is to understand what type of investor you are and establish your own investment strategy.
Cash-flow investor
Cash-flow investors purchase properties for generating stable monthly income. The focus of the cash-flow investor is on income. They know that they don’t rely on property appreciation, appreciation is only a bonus. They mainly build wealth by monthly income.
Cash-flow investors have the ability to make money in a down market. In down markets where sales are slow and property prices are falling, people normally fear to buy property and become tenants for the commercial real estate instead. Because of the excessive demand of the rental market, the rents will be even higher in the down market. In addition, the falling property prices usually appear at the end of the business cycle where stock market and other businesses normally don’t perform well. This also helps the cash-flow investors to diversify their investments and make more money in the down markets.
Long-term “hold” investor
Unlike cash-flow investors, long-term hold investors rely on property appreciation for wealth building. They often buy in the down market and sale in the up market. They have the ability to improve the condition of the building and increase the value of the property by improving the cash flow of the property. Long-term hold investors are patient investors with sufficient capital, they don’t need the passive monthly income to pay down the mortgage or other expenses associate with the holding of the property. They will even buy land decades ago and wait for the appreciation. It’s a too simple strategy, but it has worked incredibly well for many wealthy investors.
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