Investing in commercial real estate is an excellent method to build wealth. It provides one of the highest income streams, which invites many new investors to break into the retail industry.
However, buying commercial real state is a crucial investment, and your decision to become an investor should not happen overnight. You can’t just buy a random lot for sale in the Philippines and hire a wheel loader to begin the construction of your first commercial building. Here are some things that you need to know about investing in commercial property:
Why Invest in Commercial Real Estate
There are three primary reasons why buying a commercial real estate is a great investment opportunity:
1. Provides higher potential income
Commercial properties have an average ROI of 6-12%, which is much higher than the 1-4% ROI of residential properties.
2. Less-saturated market
Commercial investment requires an enormous capital, and not so many people are ready to take the risk. Compared to other industries, commercial real estate is less saturated. This means that you are safe from intense competitions and have higher growth opportunities.
3. Less tenant turnover
Commercial buildings have lease agreements with tenants that range from 5-10 years. This provides the investor with a consistent and stable income stream from rentals.
What You Need to Know Before Investing
1. Know the type of commercial real estate that you prefer
Commercial properties are generally categorized into office, retail, multifamily, industrial, and particular purpose.
This is the most common commercial establishment that ranges from single-tenant offices to high-rise buildings. Depending on the property’s size, potential tenants are start-ups, law firms, and pharmaceutical companies.
Industrial buildings house manufacturing, smokestacks, or large warehouses. Typical tenants are distribution companies or manufacturing, which require the availability of docking and height specifications.
This commercial real state is usually in urban areas. Regional malls, retail centers, restaurants, and banks are joint tenants.
This property is exclusively designed for a specific purpose and can not be utilized for another use. Some examples of this commercial real estate are schools, hotels, and sports stadiums.
Examples of this property type are condos, apartments, and townhouses.
2. Location is an essential key to getting the most returns
Location has been a cliche in the real estate industry, but it still plays a vital role in generating a healthy ROI. A smart investor should choose locations that are appealing to tenants and would increase the property's value over time. Prime locations are those that have easier access to public transport, malls, restaurants, banks, and other public amenities.
3. Understand market fundamentals
It’s difficult to set realistic goals if you don’t understand the market that you are investing in. Know the fundamentals of commercial estate like legal implications, level of competition, rents, demands, and trends. If you have minimal knowledge, it is recommended that you get a qualified mentor to help you make smart decisions.
Commercial properties generate profits using two stable avenues: long-term rentals and capital appreciation. If you want to secure your future, investing in commercial real estate is the way to go.