Commercial Property Investing: The Basics

Commercial Real Estate (CRE) vs. other investments

According to conventional wisdom your investments should include some mix of savings, stocks, bonds and real estate.

While savings is liquidity defined, poor interest rates (sub 1%, anyone?) make idle cash the antithesis of “investment.” Bonds, at a return of 2 – 3%, aren’t a whole lot better. Stocks can yield high returns, but carry potential market volatility and the gains can quickly turn to pain. Yet, despite providing potential lackluster returns, investment portfolios tend to be bond and stock heavy. What about the asset class: real estate? For many investors, even high net-worth individuals, real estate is often an underrepresented portfolio asset.

Commercial Property Investing


Private REIT with 6% CoC with upside

Diversity through commercial real estate

Investing in CRE generally means:

  • Historically strong returns – Averaging an annual return of about 9.5%, over a 20-year time period commercial real estate has historically performed well.
  • Cash flow and current income — Rental income from stable commercial properties means a potential steady and predictable cash stream (translating into possible protection and diversification during financial market volatility).
  • Tax benefits – When properly structured, commercial real estate can offer investors an array of tax benefits tied to depreciation, interest, etc.
  • Pride of owning a hard asset – Owning real estate has a special appeal over simply owning a “value” of stock.
  • More control – Personal ownership affords more control over the investment, with some types of real estate.
  • A hedge against inflation — A big potential plus for your portfolio, since real estate investments tend to benefit from inflation in the long term.
  • Positive leverage – Another commercial real estate opportunity that can potentially increase ROI.
  • Diversification – Both through lack of direct correlation with the stock market AND through the variety of commercial property types available for investing.


75% pre-sold condo development LP with 45%
IRR

Different types of investments

So, what exactly is “commercial property”? From an investor’s standpoint, it’s property that is meant to generate a profit, through capital gains or rental income. For real estate investment purposes, it can be helpful to categorize commercial real estate as follows:

  • Industrial property — Includes heavy manufacturing, light assembly, flex warehouse (a mix of industrial and office space) and bulk warehouse (e.g., distribution centers).
  • Office property — Classified as Class A, B or C, depending on construction quality and location (A being best of both worlds), Central Business District (or “CBD,” which include downtown high rises in medium and larger cities) and suburban office buildings (campus-like office parks in the ‘burbs).
  • Retail property – Usually small (strip) to large (“power”) shopping centers, regional malls and out parcels, which are parcels of land within a center that are leased to individual tenants, like banks or fast-food places.
  • Multifamily – Properties like suburban garden apartments, urban midrise apartments and professionally-managed high-rise apartments that are found in larger markets.
  • Hotels – Can range from full-service, big-name Five Stars to no-frills boutique properties to extended stay hotels.

  • Self-Storage – A property with storage units or spaces that are rented to tenants, often on a monthly basis.

Self storage private fund distributing 8%
CoC with upside

 

As alluded to before, while there’s a potential upside to investing in commercial property, there’s typically a downside as well. Some risks center around these questions:

  • How do I identify commercial properties that represent strong investment opportunities?
  • How do I access and invest in them, when I don’t have connections?
  • Don’t I need a lot of capital (that I don’t have) to invest?
  • Won’t investing in commercial properties tie up that capital for a long time?
  • How on earth do I manage properties once I invest in them?
  • What if the economy tanks and businesses suffer—threatening my rental income?

Mississauga Retail/Office fully leased offering
7% CoC and upside

 

Barriers to entry into CRE space are high but welcome to R2

This is where Online real estate marketplace www.r2-re.com comes into play, through our leadership in Canadian landscape, R2 is democratizing real estate investing by granting “unconnected” investors access to curated and pre-vetted private real estate investing at different price points. The platform is fully online, leveraging technology to make everything about real estate investing faster, more efficient and transparent—all while keeping fees down.

Private REIT: US focused Retail targeting 7%
CoC and upside

As an investment vehicle, commercial real estate can provide some diversity to your investment portfolio—especially one that’s currently overloaded with savings, stock and bonds. Since commercial real estate investments can generate income through tenants that aren’t tied directly to the stock market, stable commercial properties are able to provide you with the potential for reliable and predictable cash streams. Online crowdfunding makes the whole commercial real estate decision, buying and tracking process potentially easy, convenient and affordable.

That makes this a potentially great time to diversify your investment portfolio with the commercial real estate of your choice. And the opportunity to build a more successful asset mix that’s just right for you. Keep in mind that real estate investing has risks, including risk of loss, and is not suitable for all investors.

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