Commercial Property Investment: A Beginner’s Guide

Commercial Property Investment: A Beginner’s Guide

Joel Colman

Joel Colman  -  4th June 2024

Commercial property is an alternative asset class that generates income and diversifies your investment portfolio. But with a multitude of direct and indirect ways to invest in commercial property, where should you start?

In this guide for first-time investors, we shine the spotlight on commercial real estate, exploring:

  • Commercial property types
  • Benefits and risks of commercial real estate (CRE) investments
  • The importance of location and market analysis in CRE investing
  • Financing options for CRE beginners
  • How to get started with commercial real estate investments

Introduction to commercial real estate (CRE) investments

Commercial property is a broad term that encompasses everything from coffee shops to office blocks and warehouses. Both tangible and familiar, it attracts large numbers of individual and institutional investors.

As a private individual, you can invest either directly or indirectly in commercial property. While they generate significant income, the high cost of commercial properties means it’s not possible for most individual investors to buy them outright. As a result, many choose to invest in commercial property using direct or indirect funds – or via a fixed-income investment. We’ve summarised the most popular options for individual investors:

  • Direct (or bricks-and-mortar) commercial property funds – These funds buy a number of commercial properties, so if one is unoccupied, the others continue to generate rent. As well as rental income in the form of an annual return, you’ll benefit from any growth in the value of the properties when you cash in your investment – though the value could also have decreased.
  • Indirect commercial property funds – These funds buy shares in companies that invest in property. As an investor, you’ll benefit from rises in share prices and dividends, rather than directly from rental income or increases in property prices. However, while they’re highly liquid, indirect commercial property funds are susceptible to stock market volatility.
    • Real estate investment trusts (REITS) – The most common type of indirect commercial property fund, a REIT owns, operates or finances commercial properties. Most REITs are publicly traded with revenue generated via rent, though there are mortgage REITs (where income is generated by the net interest margin) and hybrid REITs, which use investment strategies of both equity and mortgage REITs.
    • Property investment trusts – Pooling money to buy property and shares in property companies, many property investment trusts use gearing (where the companies borrow money) to boost the amount invested.
  • Fixed-income property investments – Loans made to property development companies to fund their commercial real estate projects, fixed-income investments are growing in popularity amongst high-net-worth investors looking for short-term, high-yielding opportunities.

Why invest in commercial real estate?

Investing in commercial property diversifies risk in your investment portfolio and delivers a range of benefits:

  • The potential for strong and stable returns – Commercial properties generate attractive leasing rates – they tend to have longer lease contracts than residential properties – offering the potential for substantial returns. And if the property is well maintained, you could also benefit from capital appreciation.
  • Diversification – Property values and rents typically increase as inflation rises, providing a hedge. And by investing in this alternative asset class, you’ll reduce your reliance on financial market fluctuations and stabilise your portfolio.
  • The opportunity to capitalise on wider economic growth – As the global economy continues to recover, the commercial sector is expected to grow too, making now a good time to consider a commercial property investment.
  • Tax advantages – Depending on the investment type, you may be able to minimise your tax liabilities with a commercial property investment.

Before you invest though, it’s important to consider the potential pitfalls of a CRE investment:

  • Rules and regulations – A major deterrent for direct investors, the purchase and maintenance of commercial properties is governed by complex requirements, which vary based on location and sector. However, a fixed-income commercial property bond gives you exposure to commercial property without the red tape responsibility.
  • Purchase costs – Commercial properties are expensive to buy, which is why most individual investors opt for direct or indirect property funds.
  • Renovation costs – Unlike their residential counterparts, commercial property tenants are likely to have diverging needs. If you invest directly, adapting an industrial, retail or office space can involve high costs.

As with any investment, conducting due diligence before you dive in is crucial. Not only will this ensure that you understand best and worst-case scenarios and tax implications. It will ensure that your investment choice aligns with your long-term financial goals and risk profile.

Understanding different types of commercial properties

There are four categories of commercial properties, each offering advantages and disadvantages:

Retail properties

From shopping centres to supermarkets and high street shops, retail properties sell goods and services directly to consumers.

Advantages of investing in retail include the potential for long-term leases and stable income. However, the retail sector is vulnerable to economic downturns. Recently, it has been impacted by fast-evolving consumer behaviour – the shift to online shopping, for example – as well as closures caused by the pandemic. Greater management and maintenance requirements are also a factor to consider.

Office spaces

Encompassing everything from high-rise buildings in city centres to retail parks, this market has been dramatically impacted by the pandemic and the rise of home working.

With the potential for long-term tenants – and higher rent per square foot than residential properties – an investment in office spaces still offers the potential for strong returns. However, it’s crucial to research options thoroughly and conduct due diligence before investing.

For example, we partner with a commercial property expert. Leveraging extensive expertise and experience, our partner acquires UK office space at a reduced price, before redesigning and refurbishing it to meet the needs of SMEs, an area where there’s significant demand. As a result, our partner is able to offer fixed-income bonds that combine high returns with robust security structures.

Industrial real estate

Industrial real estate – properties used for manufacturing, logistics and warehouses – is characterised by longer lease terms with lower tenant turnover rates.

The industrial sector is less sensitive to economic fluctuations than the retail or office sector. However, costs are high – not just for purchases but also for modifications to suit specific tenant needs. Location is also critical to the success of an industrial real estate investment, as properties must be close to transportation hubs.

Multifamily properties

If a residential property – an apartment building, for example – contains five or more units, it’s classified as a multifamily property and considered part of the commercial real estate sector.

In areas with population growth, multifamily properties offer consistent rental income. As an investor, you can benefit from economies of scale in management and maintenance when compared to single-family rentals. That said, regulations and rent control in some markets can limit profit margins. What’s more, multifamily properties need active involvement, in terms of upkeep and in managing tenants.

The importance of location in commercial real estate

It is difficult to overstate the importance of location when it comes to CRE investing. From retail spaces to office buildings and industrial warehouses to apartment blocks, the location of your commercial property is intrinsic to its value, appeal and overall success.

One element of this relates to visibility. When weighing up whether to invest in a commercial property project – either directly or indirectly – consider its location in terms of proximity to major roads, public transport hubs and airports.

Demographics also has its role to play. It’s important to consider whether a commercial property is positioned for its target market – and whether products and services align with local demand. For example, industrial facilities are more likely to succeed if they’re close to manufacturing and logistics hubs.

This is another area where it’s useful to gain the views of an expert. Our partner provider leverages extensive experience to purchase commercial property in areas with strong transport links and the potential for significant growth, for example.

Market analysis for commercial property investments

Before investing in CRE, it’s important to conduct a thorough market analysis to ensure you understand everything from current trends to future market potential and supply and demand dynamics. Of course, depending on the type of investment – direct or indirect, fund or fixed income – this might be something the investment provider will undertake on your behalf.

While there’s some overlap with the importance of location as detailed above, factors that a market analysis should cover include:

  • Asset class – Office investments are more likely to succeed in financial hubs, for example, and hospitability projects in tourist hotspots. It’s worth looking at asset classes that have performed well historically. You could also look to invest in areas currently undergoing regeneration, as properties there are likely to appreciate over the long term.
  • Local economics and competitors – To understand the market landscape and make future-proof investment decisions, it’s important to consider which industries are succeeding in the local economy and which are the biggest employers.
  • Population growth trends – Analyse population trends to determine the potential of an area for a commercial real estate investment.
  • Average income – Before investing in a new market, ensure that potential tenants earn enough to pay rent. A region with a healthy economy is likely to have higher demand for office spaces and retail outlets – attracting tenants who are willing to pay more.

Your CRE investment strategy should also include a financial assessment – one that covers initial capital requirements, ongoing expenses and the implication of a range of factors including tenant churn and interest rate fluctuations.

Remember, due diligence is central to the success of any investment. If you’re considering a direct investment, conduct surveys and property inspections. And if you’re looking to make an indirect investment – via a fund, REIT or fixed-income bond, for example – your due diligence needs to cover the company that’s handling your investment. Investigate their track record and ask them how they approach the vetting process when deciding how and where to invest.

Financing options for commercial real estate beginners

There are myriad options when it comes to financing your commercial real estate investment. Of course, you may already have cash in the bank. Alternatively, consider taking out a loan or mortgage with a fixed interest rate and repayment terms – though they’re generally subject to strict eligibility requirements and the approval process can be lengthy and arduous.

In recent years, crowdfunding has become a popular option for financing an investment in commercial property, especially for first-time investors. Offering greater flexibility and less stringent eligibility requirements, crowdfunding involves pooling money from multiple investors – though it’s crucial to conduct sufficient due diligence when researching the platform.

Meanwhile, REITs offer a low entry point for investors looking to break into the commercial property market. And for the fixed-income property bonds offered by our provider partner, the minimum investment amount is $25,000. Ultimately, the financing option you choose will depend on your financial goals and circumstances, as well as your attitude to risk.

How to get started with commercial real estate investment

Considering an investment in commercial property? We can help. Our meticulous approach to due diligence has led us to our partner: an award-winning UK-based asset management company that leverages its extensive experience to create unrivalled investment opportunities in the fixed-income space. Acquiring commercial office assets at reduced prices, our partner redesigns and refurbishes them to meet the needs of SMEs.

Our partner offers fixed-income bonds that deliver significant returns over a 12-month term, along with flexible payment schedules and robust security structures that include a legal first charge and a debenture loan against all assets. Check out our investment calculator to find out how much you could earn.

Frequently Asked Questions (FAQs) About Commercial Real Estate

Is commercial property still a good investment?

With the potential for higher returns than residential property, a commercial property investment can play an important role in diversifying and stabilising your investment portfolio and delivering a regular income stream.

What type of commercial real estate is the most profitable?

All types of commercial real estate investments – industrial, office, retail and multifamily – can be profitable. Location is an important factor in profitability, with properties in a strategic location at a competitive advantage.

What is a good ROI for commercial real estate?

Return on investment depends on a multitude of factors – risk profile, investment type, asset class and length of time in the market, to name a few. A good ROI is generally considered to be anything from around 8% per annum. Our fixed-income commercial property bonds deliver returns as high as 17% per annum.

How do investors make money in commercial real estate?

Most of the income generated from commercial property investments comes from rent, though capital appreciation is another factor.

What are the pitfalls of buying commercial property?

Costs of commercial property are generally higher than residential property. Investors also need to consider higher maintenance costs, tax implications, insurance and regulations. To avoid mistakes, due diligence is essential to the commercial property investment process.

Interested in finding out more about how a fixed-income investment in commercial property could bring stability and growth to your portfolio? Get in touch.

Joel Colman
Joel Colman

Joel Colman

Co-Founder Director

To find out more about our commercial property partner and their top-tier fixed-income bonds, simply use the link below to book a slot in my diary for a chat.

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