Commercial real estate investing is a great alternative to make money in real estate if you aren’t particularly interested in residential real estate investing. If you’re not familiar with commercial real estate practices, it may be intimidating. However, it’s easier than you think to get involved in this niche real estate market.
The Benefits of Investing in Commercial Real Estate
Commercial real estate offers many benefits to investors; some of which are unique to commercial real estate.
One substantial benefit is that commercial tenant leases are usually longer than a standard residential lease. It’s not uncommon for commercial lease terms to be five, ten or even 15 years. Businesses are not keen on moving their operations, so they like to lock in their tenancy once they find a prime location. Moving is a very expensive undertaking for a business and can run into the tens or hundred thousands of dollars. They often have to move heavy business equipment, relocate employees, and set up new office configurations. Businesses don’t want to move because they have customers who know where they’re located. Trying to ensure that old customers can find them in their new location is a risky and pricey endeavor. Since they don’t want to have to move due to increases in rents, businesses also like to lock in rates for as long as possible, which is another reason why the lease contract terms are often so long. These long-term business leases mean much lower vacancy rates for the commercial real estate investor.
Another huge benefit of getting involved with commercial real estate investing is the wide range of opportunities available to you. Residential real estate is obviously limited to residential property; whereas there are lots of different kinds of businesses and industries that provide a way in for the commercial real estate investor. Following are some of the interesting options available if you want to get into commercial real estate investing.
1. Private Money Lending
Private money lending is a way of investing in commercial real estate where you act as the bank. Your funds provide the means for developers to build projects of all sizes, just like a bank lender might do.
Private money lending is a truly passive way of investing. Just like residential real estate, investing in commercial real estate can be complicated and cumbersome when you attempt to handle it all yourself. Even though your tenants are businesses, you may find yourself dealing with similar issues like late rent payments, tenants that overly complain about minor issues, and similar aggravations.
When you do private money lending, you will never have any of those issues. You provide a portion of the funds for the project; be it a residential housing development (still commercial since you’re partnering with the commercial developer, not the residential buyers or tenants), a commercial real estate renovation and flip, commercial land development or a multi-family residential renovation and flip. You never have to directly deal with any issues at any stage of the project. All you have to do is collect your payouts and final disbursement when the project is finished. Alternatively, you have the option—and many savvy commercial real estate investors do this—of rolling your principal into the next project.
The benefits of private money lending include a more diverse investment portfolio, working with established developers, secured investment and very little investment, and a truly passive experience.
Finally, an often-overlooked benefit of being a private money lender is that you don’t need any credit approval to get into it. You don’t need a bank’s okay to become an investor as a private money lender. Unlike every other commercial real estate investment out there, your money is your entry ticket into the lucrative world of commercial real estate through private money lending.
2. Coin-Operated Buildings
Coin-operated real estate isn’t nearly as sexy as private money lending, but if you want to get into commercial real estate, they are a viable option. You also won’t get the passive experience that private money lending gives you, but some consider coin-operated businesses to be the next best thing. Common coin-operated commercial real estate enterprises include car washes and Laundromats. These are commercial real estate options that allow a partial hands-off experience because the customer takes care of their own needs for the most part.
Of course, the hidden, behind the scenes work is in making sure the mechanics of the operation are in full working order. Moreover, with daily use of these buildings, there are bound to be significant maintenance and repair costs. Both of these commercial real estate investments also use a lot of water and energy, which eats into profits. Still, they are economically feasible ways to get into commercial real estate investing.
3. Storage Unit Buildings
Storage unit buildings are another great way to get into commercial real estate investing if you aren’t quite ready to get into the complexity of purchasing an entire office building. Storage unit buildings can be a relatively straightforward commercial real estate investment; there are few moving parts, energy costs are minimal, and again, it’s a self-serve industry. Once your tenants are in, they come and go as they please, according to your terms. This type of real estate comes in all different sizes, so there’s an opportunity for you to start small with, say a 3-unit building, and grow from there.
These are three viable ways for you to get into commercial real estate investing that you may not have thought of before. Just remember that with most commercial real estate investments, you still have to do some work as the landlord, unless you hire a property manager to take care of things for you. The exception is private money lending, where your money does the work, and you have a truly passive experience. As with all investments, due diligence is necessary to ensure that you get into commercial real estate investing in a way that suits your financial goals and lifestyle.