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Different Types of Commercial Real Estate Investments
In this article, you will discover the different types of commercial real estate that are a good investment for individual investors. The majority of iconic commercial properties you drive by each day are typically owner or controlled by large investment firms; however, it is possible to purchase commercial real estate as an individual buyer and make money from it. While competing against large institutional investors can be challenging because they, literally, have unlimited amounts of money and require only a small return on their investment; individual investors need larger returns with less capital outlay. Here you will learn how to earn the larger returns while spending less initial capital.
Apartments
The first of the top commercial real estate options that are good investments is apartment blocks. Most people do not know this, but any apartment complex with five or more units considered a commercial real estate development. One of the reasons why apartment complexes are the best investment opportunity is because it is the simplest commercial real estate to purchase, and it is possible to generate large amounts of cash flow – think about it, people always need somewhere to live.
Statistics have indicated that apartment complexes can generate approximately $500,000 to $5 million on an annual basis making it easy to increase equity. The property is also a good tax shelter, plus you are able to force property appreciation by increasing rental or reducing expenses.
Unfortunately, apartment complex purchase does have drawbacks, and these include neighboring developers building more attractive apartments. New buildings with more advanced features can detract from your property; therefore, resulting in a reduction of rentals. It should also be noted that you could encounter “bad tenants” and have to deal with people who do not pay rent.
Self-Storage Facilities
Self-storage facilities are commercial buildings with individual units where people can store items. The units or rooms are available in different sizes, and the price for rental will depend on the size of the room being hired. This is a beneficial commercial real estate option because, as with the apartment complex, it can generate cash flow and force appreciation. More benefits to self-storage facilities include reduced maintenance (no plumbing or exterior repairs) and no need to deal with onsite tenants. In fact, if the self-storage facility purchased is large enough to validate a property manager, you will not need to deal with the unit owners either.
Unfortunately, self-storage facilities are not always a good investment and earning money requires all of the units to be occupied. Dependent on the size of the facility, this can take a while to achieve and generating a return on income could take some time to occur. Moreover, if the facility is in a poor location, there is little chance that you will rent any units at all.
Shopping Centers
Shopping centers or shopping malls (outdoors and indoors), listed by 3cre can be considered good commercial investment opportunities. This is primarily due to their stability, and the majority of tenants will sign a lease between 10 and 20 years.
While this can seem a long time to rent a property, running a shopping mall takes time to establish. It is recommended that you begin small and upgrade as the years progress; thereby, earning money when the mall begins to advance and takes on new vendors.
Despite being a good commercial real estate investment, shopping malls are strong long-term investments and require lots of capital to begin gaining a return on the investment. If a major tenant within the mall leaves, it can affect your income by approximately 25% to 30%; however, you will need to continue paying the mortgage for the absent tenant until you can locate a new one. Shopping malls can earn a person a great deal of money, but you need to be wary when running this type of financial facility.
Office Buildings
Commercial office blocks range from single buildings with a single tenant to high rises with over hundreds of floors and numerous tenants. Similar to apartments, this option is one of the most financially beneficial commercial real estate alternative; particularly in a time when the economy is booming and allowing office rents to be higher than before. If you are able to hold onto an office building for a long time, it is possible to generate strong cash flow and make a good return on investment. Similar to the shopping center, it is recommended that you purchase a small building first with multiple tenants on long leases before expanding to larger properties.
Unfortunately, while office blocks can be beneficial to one’s financial wellbeing, they do have drawbacks. One of the greatest drawbacks is that the success of an office complex ownership is greatly dependent on the economy. This means that if the economy drops, the office building’s value will reduce dramatically and your ability to earn income will decrease.
The Mobile Home Park
Mobile home parks are classified as commercial property because of the size of the area, and it is possible to obtain several variations of the mobile home park. One type is where you own the mobile home park and the tenants bring their own mobile home. Another is where you own the mobile home and the park and rent out both of these items. Oddly enough, if you are looking to earn more income, it is recommended that you opt for the former type because there is no need for mobile home maintenance or additional expenses.
Investing in mobile home parks can be beneficial because they produce regular cash flow as affordable housing is in great demand across the country. Moreover, tenants will often stay for a long time when they find a mobile home park that suits their needs. The majority of mobile home parks are financed by the seller, and it is not often that you find new parks being built; therefore, the competition is greatly reduced.
Unfortunately, mobile home parks do have a negative reputation and finding financing for these parks can be difficult to obtain. This means that it can be difficult to gain initial capital to invest before you can even begin earning an income.
As can be seen, there are several types of commercial real estate investment opportunities for individual investors. Using this guide, you can determine which investment option is best for your needs.
