Is Commercial Property a Good Option to Invest In?
Table of Contents
2. Cons of Investing in Commercial Property
3. Key Considerations When Investing in Commercial Real Estate
4. The Best Real Estate Investment for Accredited Investors: Multifamily Syndication
5. Work With BAM Capital for the Best Multifamily Real Estate Syndication Deals
Should Accredited Investors, Invest In Commercial Real Estate?
Investing in a commercial property is one of the best ways to get into real estate. It has long been an attractive option for those who are seeking to diversify their portfolios while generating consistent returns.
Commercial real estate (CRE) investing involves purchasing, owning, leasing, or selling property that is exclusively intended for business or income-generating purposes. This typically includes office buildings, retail spaces, and industrial warehouses. [1]
Multifamily apartment communities can also be considered commercial properties if they have five or more units. However, when people talk about commercial real estate, they typically refer to properties that are used as workspaces.
Commercial properties are leased to tenants to conduct income-generating activities. It’s a broad category that includes everything from a single storefront to a huge shopping center. [1]
Investors engage in commercial real estate for various reasons like property appreciation, tax benefits, and the potential for regular rental income. Done properly, it can offer opportunities for long-term wealth accumulation and financial growth.
However, just like any investment, it comes with its own set of risks and considerations. Here we will discuss whether or not commercial real estate is a good investment.
Pros of Investing in Commercial Property
There are several compelling advantages investors can get from commercial real estate properties. This may be a good fit for you if you are seeking long-term financial growth and stability.
Commercial real estate tends to generate higher rental income compared to residential properties. Businesses and tenants also typically sign longer leases, providing a steady stream of income for investors.
These properties are associated with a strong income potential. Commercial properties can have an annual return off the purchase price between 6% and 12% depending on the location, the economic condition, and certain external factors. On the other hand, single family homes ordinarily range from 1% to 4%. [2]
Additionally, commercial leases often include provisions for annual rent increases. This helps investors hedge against inflation while potentially increasing cash flow over time.
If you are looking to diversify your investment portfolio and build wealth over the long term through a passive income source, consider investing in commercial real estate.
Commercial properties also offer greater potential for appreciation in value. Just keep in mind that factors such as location and market demand can still influence the value of commercial real estate assets. As such, well-located commercial properties in thriving business districts or high-demand areas have the potential to experience substantial capital appreciation over time.
Investors can even work on actively enhancing the value of their commercial properties through strategic renovations, expansions, or redevelopments. Holding onto their commercial properties for an extended period can potentially result in significant wealth accumulation for investors.
With commercial real estate investing, investors can also enjoy the fact that their tenants are business owners, meaning interactions tend to be more professional. Problem tenants are typically a bigger headache for landlords who own residential properties. [2]
On top of all these benefits, there is also the concept of triple net leases. While there may be variations to this concept, the general idea is that the property owner does not have to pay expenses on the property. It is the lessee who takes responsibility for these expenses, including real estate taxes. The property owner only has to pay for the mortgage. [2]
There are plenty of good reasons to consider investing in a commercial real estate property. But of course there are also downsides to think about before jumping into this investment strategy.
Cons of Investing in Commercial Property
Commercial real estate may give investors strong returns, but one significant con is the high barrier to entry. Unlike single family residential properties, commercial properties typically require substantial upfront capital. It normally involves significant costs such as down payments, closing fees, and ongoing maintenance expenses. [2]
Although real estate in general can be expensive, commercial properties are even more so due to their larger size. Individual investors, particularly those with limited resources, may find it challenging to enter the market. [2]
Another drawback of investing in commercial property is the potential for higher vacancy rates and longer leasing periods. Residential properties typically have shorter lease terms. Meanwhile, commercial leases often span several years.
Long-term leases can provide a stable income stream, however, they also expose investors to the risk of prolonged vacancies if tenants decide not to renew or terminate their leases prematurely.
Vacant commercial properties not only result in lost rental income but also incur additional costs such as maintenance, property taxes, and insurance. On top of that, you have to find new tenants to replace the ones you’ve lost, and that can be time-consuming.
Speaking of time-consuming, owning a commercial retail building is a huge time commitment. In order to maximize your return on investment (ROI), you need to play an active role as the landlord. This means having to deal with multiple leases, maintenance costs, tenant concerns, and public safety concerns, among other things. [2]
Because of the fact that these properties are intended for commercial use, they tend to get more public visitors, meaning there are more people who could potentially hurt or damage your property. Incidents can occur anywhere, but the chances of experiencing these things increase when investing in commercial properties. [2]
So while investing in commercial property can be rewarding, investors should carefully weigh these potential downsides before committing their capital.
Key Considerations When Investing in Commercial Real Estate
In order to mitigate the risks and improve your chances of success in commercial real estate, there are some key factors to consider. Investors should conduct a thorough market research to understand the demand and supply dynamics, rental rates, vacancy rates, and economic trends in their target location.
Once you have found a prospective investment property, evaluate its potential for cash flow generation and appreciation.
As always, conducting comprehensive due diligence, including property inspections, environmental assessments, and zoning regulations, is important. This will help you identify potential issues before you make your investment. It will also allow you to narrow down your investment options.
Location, Location, Location
When investing in commercial real estate—or any type of real estate—location is considered the most critical factor, and for good reason.
A property’s location significantly impacts its desirability, rental potential, and ultimately its value. Investors should go for investment properties that are located in an area that is accessible, visible, and has the potential for economic growth. Proximity to amenities and transportation hubs can also attract more tenants.
This is especially important for commercial properties since businesses want as many customers as possible. Properties situated in prime locations with high foot traffic and strong economic fundamentals tend to perform better over time. The real estate market is very competitive, so choosing the ideal location is essential. A popular location can make tenants and investors feel more secure. [3]
On the flip side, investing in a poorly located property could result in lower occupancy rates, which translates to reduced rental income and diminished resale value.
Tenant Quality
The quality of tenants can significantly impact the success of a commercial property investment. Stable, creditworthy tenants with long-term leases reduce vacancy risks and ensure steady rental income.
High-quality tenants, such as established businesses with strong financials and reputable brands, are more likely to fulfill their lease obligations consistently. The good news is that these are easier to find if your property is well-located.
These tenants also tend to be more resilient during economic downturns. This reduces the risk of financial losses for property owners. Thoroughly assessing the creditworthiness, stability, and reputation of potential tenants is essential for your property’s long-term success.
Risk Tolerance
Risk tolerance is a critical consideration when investing in commercial real estate. Understanding your own level of risk tolerance allows you to make more informed decisions when it comes to your investment.
Investors who don’t have the stomach to deal with significant risks should settle for lower-risk investments. Keep in mind that this also generally means lower returns. You are exchanging higher potential income for a safer investment. [4]
Real estate investing is generally considered safe and stable. However, larger properties such as commercial real estate may require higher capital investments, which can be risky for a lone investor. If you do not have experience with property management, the risk of your investment failing may be greater.
With an understanding of your risk tolerance, you can choose the right investment strategy that will allow you to reach your financial goals. [4]
Seek Professional Advice
One important thing to remember when it comes to commercial real estate investing is that professional help is necessary. Chances are, the regular real estate investor does not have the expertise and knowledge needed to handle a large investment property like a commercial building. They may find it overwhelming having to deal with maintenance issues, emergencies, and tenant concerns. [2]
Seeking professional advice is paramount. Commercial real estate transactions often involve substantial financial commitments and complex legal considerations that can be difficult to navigate.
Engaging with professionals such as real estate agents, attorneys, and financial advisors can give you some expert guidance throughout the investment process.
These professionals can help investors navigate intricate lease agreements, zoning regulations, property valuations, and financing options. Additionally, they can offer insights into market trends, potential risks, and opportunities for maximizing returns.
By leveraging the knowledge and experience of industry experts, investors can make smarter decisions and mitigate potential pitfalls instead of going in blind.
The Best Real Estate Investment for Accredited Investors: Multifamily Syndication
There’s no doubt that investing in commercial property can be a lucrative opportunity that comes with several benefits. Depending on your risk tolerance and financial goals, this can definitely be a good option to invest in.
However, it does have its drawbacks, and you may want to consider certain alternatives. If you are an accredited investor, real estate syndication is another good option to consider. It offers many of the benefits of owning real estate, but with much fewer drawbacks.
Real estate syndication is a true passive investment in real estate, meaning you don’t have to be a landlord and put in all that work managing a commercial property by yourself.
You still have to do your research and conduct your due diligence, but everything else is done by the syndicator. Here’s how it works.
Real estate syndication involves multiple investors pooling their resources together to purchase a single real estate property. This investment strategy can be done with any type of real estate, including commercial properties. [5]
Because of the strong and predictable cash flow of multifamily real estate properties like apartment communities and condominiums, investors prefer multifamily syndication.
Unlike owning a commercial property and becoming a landlord, multifamily syndication does not require a significant time commitment.
A syndicator or sponsor is the one to put the deal together. Serving as the general partner (GP) in the deal, they take on most of the responsibilities in the syndication. This includes locating the investment property, conducting due diligence, crafting a business plan, and finding accredited investors who will participate in the syndication. Once the deal is in place, it is also the syndicator who executes the business plan. [5]
Investors serve as limited partners (LPs) in the syndication deal. Their job is limited to providing most of the capital needed to acquire the real estate property and paying certain fees. Beyond that, they have no further responsibilities. [5]
Investors love multifamily syndication because it allows them to participate in larger real estate investments that are normally inaccessible to them. After all, apartment communities are typically too expensive for a lone investor. It is also very risky to try and purchase a large multifamily property all on your own.
In exchange for their investment, real estate investors get a share of the property’s monthly rental income. Depending on the deal structure, they may also get a share of the property’s equity upon resale. Every deal is different, so it is still important for investors to do their due diligence before joining a syndication deal. [5]
Because the syndicator also takes care of property management, investors can just sit back, relax, and enjoy the strong and predictable cash flow.
Just remember that no investment is without risk—and that also applies to multifamily syndication deals.
Syndication deals are typically exclusive to accredited investors since it still requires a significant amount of capital upfront. These deals also tend to last for several years, so real estate investors should be comfortable with a bit of illiquidity. Accredited investors have the ability to assess these syndication deals thanks to their investing experience and knowledge.
Work With BAM Capital for the Best Multifamily Real Estate Syndication Deals
For accredited investors who want to add multifamily real estate to their investment portfolio, real estate syndication may be one of the best ways to access these larger properties.
But because this is a passive investment and the syndicator makes all the decisions, you need to find and work with a syndicator that you trust. Some investors do not like taking the backseat in an investment. And while the syndicator will keep investors updated on the status of the investment property, investors themselves do not have control in this deal.
Work with a trustworthy syndicator with a track record for excellence. Work with BAM Capital.
Considered a leader in its industry, BAM Capital is trusted by accredited investors because of their award-winning investment strategy.
This Indianapolis-based syndicator prioritizes high-quality multifamily real estate properties that are Class A, A-, and B++. They focus on properties with in-place cash flow and proven upside potential. Their strategy creates forced appreciation while mitigating investor risk. This is why BAM Capital now has over $700 million AUM and 5,000+ units. [6]
Investors will also be pleased to know that BAM Capital is vertically-integrated. This means they can handle every step of the syndication process, from acquiring high quality multifamily properties to renovating and managing them. They can guide you throughout the whole process. [6]
No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.
For accredited investors who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, schedule a call with BAM Capital and invest today.
Sources:
[1]: https://www.investopedia.com/terms/c/commercialrealestate.asp
[2]: https://www.nolo.com/legal-encyclopedia/pros-cons-investing-commercial-real-estate.html
[4]: https://www.bankrate.com/investing/what-is-risk-tolerance/
[5]: https://multifamilyrefinance.com/apartment-investing-blog/multifamily-syndication#important
