Over the course of human history, few investments have fared historically as well as real estate. When considering investing there are no wrong types of real estate to invest in; however, you must fully understand the benefits and risks associated with both residential and commercial real estate investments.
The two main classifications of real estate investing are residential vs commercial property, and there are subsets to each of these sectors. The commercial real estate realm breaks down into the following major classifications: office buildings, retail buildings, industrial parks (warehouses and factories), multifamily properties (apartment complexes), hospitality structures (hotels & motels) as well as self storage units and land. No commercial real estate class is inherently better or worse than the other, and it’s more about lining up individual risk tolerances and investment objectives with the real estate sector that is best suited to meet your needs.
Residential real estate is broken down into single family rentals, single family flips (rehabbing and then selling a property quickly) and multifamily housing (usually 4 units or less per property).
- Its Ok To Hold Onto Those Houses: Just because you’re moving into commercial property investments doesn’t mean you shouldn’t continue to invest in residential properties as well. Keeping a diversified portfolio is a good way to mitigate risk.
- Know Your Niche: It’s very important to understand exactly where you’re investing your time and money, and you’ll need to have a solid foundation to stand on. Make sure you understand the overall economy and market drivers of each of the classes you are looking to invest in. In the beginning, it is usually best to try and master one property type before spreading yourself too thin.
- Build a Buddy System: Once you have identified the real estate markets you want to invest in, take the time to get to know the town and build a network of people who work in the area and could help you make the right decisions. Whether it’s a seasoned commercial real estate broker, property managers, appraisers, etc. make sure to have a group of people you can consult with before making any major discussions or purchasing a property too early.
- Math Equals Money: There are three primary ways to value all real estate.
- Sales or lease comparables
- Replacement cost
- Income approach
Residential properties typically stress comparable homes in the neighborhood while commercial properties stress the third method and the property’s Net Operating Income (NOI). Terms like cap rate, NOI, loan to value ratios and profitability are all common terms in commercial property investments, and it’s very important to have a thorough understanding of each in order to properly invest. Don’t forget to contact a local CPA to best leverage the potential tax benefits of real estate ownership as well.
5. Make sure you are properly capitalized: Many people are so excited to purchase assets, they stretch to afford what they want without underwriting enough reserve funds to cover any unforeseen obstacles such as a tenant bankruptcy or major capital improvements or repairs. If there is not enough to cover the building for a MINIMUM of three months vacant then it might not be the best deal for you.
Commercial property investments are a great way to build generational wealth that can forever change not only your lifestyle but also that of your loved ones.
Want to learn more? Feel free to contact us with any questions you may have!
Commercial Real Estate Broker in Charleston, SC
Mike Ferrer, CCIM, MCR has over 18 years of commercial real estate Brokerage and Development experience. With a focus on warehouses, manufacturing, office buildings, vacant land, and Investment Sales. He opened his own brokerage in 2015, and has completed over $250,000,000 in transactions throughout the Lowcountry.
Mike is the past president of the Commercial MLS for the state of South Carolina and has served on many other civic and philanthropic boards. Mike has a plethora of commercial real estate knowledge and established ties to the local community both statewide and stretching across the entire southeast.