Commercial RE Investing Guide

Commercial Real Estate Investing Guide - How to Get Started | FortuneBuilders 11/10/19, 1'22 AM
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Commercial Real Estate Investing 101:

How to Get Started
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Key Takeaways
Types of commercial real estate
Benefits of commercial real estate
https://www.fortunebuilders.com/how-to-invest-in-commercial-real-estate-getting-started/ Page 1 of 21
How to invest in commercial real estate
Loans for commercial real estate
Investing in real estate is a great way to build wealth. Commercial real estate investing,
in particular, is known to provide some of the highest income streams. If you’ve been
investing in residential real estate for a few years and have been wondering how to invest
in commercial real estate, this guide serves to break down everything you need to know to
get started.
Commercial Real Estate Investing Trends In 2019: What’s

New?
Not unlike their residential counterparts, commercial real estate investing trends are
subject to cyclical changes. In fact, you could easily argue that commercial real estate
investing is subjected to more changes than those found in the residential market. If for
nothing else, the commercial real estate industry is made up of several sectors: industrial,
retail, multifamily, office and hotel—to name a few. Consequently, each sector’s
expectations are at the mercy of unique needs and demands, not the least of which change
in conjunction with the economy. Needless to say, there are countless variables that will
inherently influence the performance of any commercial real estate sector, and investors
need to be aware of how they impact current and future trends.
As the book starts to close on this year, one commercial real estate sector has stood out
from the rest: industrial real estate. According to the NCREIF Property Index (NPI), “the top-
performing CRE sector right now is industrial.” Comprised of warehouses, manufacturing
facilities, refrigeration and storage assets, data centers and other assets, industrial real
estate is actually outperforming apartment, office and retail sectors by a large margin.
Thanks, in large part, to the growth of online shopping, industrial commercial real estate
assets are actually at the forefront of the U.S. economy, and their value has never looked
better.
It is worth noting, however, that while commercial real estate is incredibly appealing in
2019, it remains too expensive for the average investor to consider—or, at least, it was.
While investing in commercial real estate does come with a higher price tag, one new trend
is leveling the playing field: crowdsourcing. The ability to crowdsource a commercial real
estate investment is not only becoming more feasible, but it’s also more common than
ever. The ability to crowdsource funds for investing in commercial real estate now gives
real estate investors the opportunity to transition from residential deals into commercial
deals, which bodes well for a bright future. That said, it’s fair to assume we will start to see
more small investors breaking into the commercial world.
What Qualifies As “Commercial Real Estate?”

Commercial real estate is property that is typically leased out for business and retail
purposes. Investing in commercial real estate involves the purchase or development of
properties that have been designed with the intent of housing commercial tenants. Unlike
a residential real estate investor, commercial real estate investors lease out and collect rent
from the businesses that occupy space in their properties, rather than from residential
tenants. It should also be noted that raw land purchased for the development of
commercial property is also included in this definition. Commercial properties can
generally be categorized into five main types. Keep reading to learn more about each one.
The 5 Types Of Commercial Real Estate

Before we get into the mechanics of how to invest in commercial real estate, it’s important
to understand the various types of commercial properties. This way, you can start thinking
about the commercial asset type in which you want to specialize. Commercial properties
serve a broad range of purposes, but are generally grouped into the following types:
Office
Retail
Industrial
Multifamily
Special Purpose
1. Office
The most common commercial real estate type is office space. These buildings, which can
range from single-tenant offices to skyscrapers, are defined by one of three categories:
Class A, Class B, or Class C.
Class A commercial real estate properties are typically newly built or extensively renovated
buildings located in excellent areas with easy access to major amenities. They are typically
managed by professional real estate management companies.
Class B commercial real estate properties are often older buildings that require some type of
capital investment. Although they are well-maintained and managed, these properties require
minor repairs and upgrades—making them a popular target for investors.
Class C commercial real estate properties are typically used for redevelopment opportunities.
They are generally poorly located, require some type of major capital investments to improve out-
of-date infrastructure, and their high vacancy rates are much higher than higher-classed buildings.
2. Retail
Another popular commercial real estate type is retail buildings. These properties, which
range from strip malls and community retail centers to banks and restaurants, are often
located in urban areas. The size of these real estate properties can extend anywhere from
5,000 square feet to 350,000 square feet.
3. Industrial
From warehouses to large manufacturing sites, industrial buildings are typically geared
towards manufacturing industries, as they offer spaces with height specifications and
docking availability. In addition, these commercial properties generally lend themselves
more to investment opportunities.
4. Multifamily
Multifamily properties are comprised of apartment complexes, high-rise condominium

units and smaller multifamily units. A property is qualified as multifamily real estate
(https://www.fortunebuilders.com/multifamily-real-estate/) any time it has more than one
unit, but can also be considered a commercial property if it has more than four units. Many
residential investors get their start in commercial properties by expanding into larger
multifamily properties. Residential tenants tend to have shorter lease terms than office and
retail tenants, so tenant turnover is a factor that should be considered.
5. Special Purpose
In general, special purpose properties are designed for a specific use, so much so that it
would be difficult to repurpose the property for another use. Car washes, self-storage
facilities and schools are all examples of special purpose properties. The leisure and
tourism industries represent a large proportion of special purpose real estate as well.
Common examples within the industry include hotels, airports and sports stadiums, and
amusement parks.
Mixed-use development properties are also prevalent in the commercial real estate sector,
and continue to grow in demand. These properties represent a mix of different uses, such
as residential, retail and even public sector. A mixed-use building could have shopping and
services on the first floor with apartment units on the upper floors, for example. Read our
guide to mixed-use developments (https://www.fortunebuilders.com/mixed-use-
developments-on-the-rise/) to find out why they have become so popular in recent years.
What Is Owner Occupied Commercial Real Estate?

Owner occupied commercial real estate (OOCRE) is when investors purchase commercial
real estate with the intent of utilizing the building for their own purposes. This strategy can
be applied to any of the five commercial real estate types discussed above.
Having the option to occupy the commercial real estate in which you invest is just one of
the many benefits associated with commercial investing. Keep reading to find out some of
the other benefits that may pique your interest.
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The Many Benefits Of Commercial Real Estate Investing

Investing in commercial real estate can be very rewarding, both personally and financially.
For many, the objective of investing in commercial real estate is for future wealth and
security; others utilize it for tax benefits and investment portfolio diversification.
A commercial redeveloper can also take advantage of the following benefits:
Higher Income: The hallmark benefit of investing in commercial real estate is a higher potential
income. Generally speaking, commercial properties have a better return on investment, an
average of six to twelve percent, while single-family properties fetch between one and four
percent. Secondly, commercial real estate provides a lower vacancy risk, as properties tend to
have more available units. (Consider this: one vacancy in an office building with 25 commercial
spaces will negatively impact an investor’s bottom line more than one vacancy in a residential
duplex.) In addition, commercial leases are generally longer than those you will find in residential
real estate. This means that, commercial real estate owners have to deal with far less tenant
turnover.
Cash Flow: Commercial real estate has one very distinct advantage: a relatively consistent stream
of income due to longer lease periods. In addition, commercial properties often have more units
than residential properties, which means you can achieve economies of scale and multiply your
income streams much more quickly. Known in the industry as a triple net lease, many commercial
tenants also pay the building’s real estate taxes, property insurance and maintenance costs, thus
increasing your owner benefits.
Less Competition: Another advantage associated with commercial real estate is relatively less
competition. Because of the perceived difficulty of commercial investing, the commercial space
tends to be less saturated with other investors.
Longer Leases: Perhaps one of the biggest perks of commercial real estate is the attractive
leasing contracts. Commercial buildings generally have longer lease agreements with tenants
compared to residential properties, which, as previously stated, offers investors impressive
returns and significant monthly cash flow. In many cases, lease agreements for commercial
properties are signed for multiple years.
Commercial real estate investing offers investors an array of opportunities and advantages
that other investment strategies do not. Once the benefits of commercial real estate
investing are recognized, the next step is dive in. Read the following to receive tips on how
to get started in commercial real estate.
How To Invest In Commercial Real Estate: Getting Started

The question of ‘how to invest in commercial real estate’ has only one answer: with due
diligence. Regardless of what sector or niche you’re in, doing your homework and minding
your due diligence is a critical element in ensuring your success in real estate. In addition to
learning the ins and outs of commercial investing, make sure you understand the
commercial real estate market and how it can differ from the residential real estate market.
If you’re ready to embark on your first commercial endeavor, be sure to abide by the
following tips:
1. Understand How Commercial Real Estate Is Di!erent

The first step as a commercial investor is understanding that commercial real estate is
valued differently from residential properties. Unlike residential real estate, the income
from commercial real estate is typically related to usable square footage. In addition,
commercial property leases typically last longer than those of residential leases. These two
factors help illustrate why a commercial real estate investor has a better potential to earn a
higher income.
Location is an important factor regardless of your investing niche, with commercial

investing as no exception. However, commercial investors also need to pay close attention
to their tenant type. The location and intended tenant type are two factors that intersect
closely when determining demand. For example, a space intended for corporate offices will
likely have better performance in an urban center compared to a primarily residential
neighborhood. Analyzing recent comparables can provide you with a better clue as to how
your property of interest might perform.
2. Analyze Comparables
The next step is to analyze comparables in the area and research future developments.
Otherwise known as “comps,” these assets refer to prices paid for recently sold properties
that are similar in location, size and style. Analyzing comps will help you determine the
current market value of a property. A general rule of thumb when determining comps is to
choose a property where the square footage does not go beyond 10 percent higher or
lower than that of the property being evaluated. This will allow for the most accurate
comparables possible. Read more on tips for pulling the most accurate comparable sales
(https://www.fortunebuilders.com/comparable-home-sales/).
3. Use The Right Success Metric

Commercial real estate investing involves a wide array of calculations, as well as an
understanding of real estate finance. To be a player in commercial real estate, there are
several formulas you should know.
Net Operating Income: This is a calculation that equals all revenue and costs from a particular
property. Configured before taxes, this number provides investors with an idea of how much
they’ll make from an investment minus all necessary operating expenses. Operating costs typically
consist of insurance, property management fees, utilities, repairs and janitorial fees, utilities and
property tax.
Cap Rate: Used to calculate the value of income producing properties, the “cap rate” — short for
capitalization rate — will provide investors with an estimate of future profits or cash flow. This is
essentially the ratio of net operating income to property asset value.
Cash On Cash: Cash on cash is a metric that provides investors with a rate of return on their
commercial real estate transactions. It’s typically used by investors who rely on financing to
purchase their properties. Cash on cash measures the return on out-of-pocket cash invested
relative to the portion that was financed. This will provide an accurate analysis of an investment’s
performance.
The above formulas serve as an introduction to complement our complete guide to real
estate calculators (https://www.fortunebuilders.com/real-estate-calculator/) that every
investor should know.
4. Commercial Real Estate Investing Mistakes To Avoid

As a commercial real estate investor, it’s just as important to know what not to do as it is to
know what to do. Today’s best investors already know it, and it’s about time you did too:
mitigating risk is the single greatest thing a real estate entrepreneur can do for the success
of their business. Mitigating risk exposure is the best way to increase the likelihood of
success. That said, here’s a list of some of the most common mistakes commercial real
estate investors need to avoid:
Improper Valuations: Every single commercial property is unique, and investors need to be able
to account for variances that may be found in each asset. Failure to account for every detail
involved in an asset’s valuation could lead to financial ruin. Therefore, commercial real estate
investors must be fully aware of what they are buying, and for how much. The inability to account
for the try value of a property will impact nearly every step moving forward, so it’s important to
get things right at the time of acquisition.
Financial Ignorance: Failing to understand the financial intricacies of commercial real estate
investing can be devastating. IF for nothing else, commercial deals are not the same as residential
ones. Investors will need to learn the differences, not the least of which include the loan-to-value
(LTV) or debt service coverage ratio (DSCR).
Neglecting Due Diligence: While today’s market requires decisive decision making, it’s important
to mind due diligence. It’s better to lose a deal to someone else than to buy into a deal you aren’t
prepared for. As a result, more investors need to take the appropriate time to learn as much
about a property as they can before they buy it.
Not Working With a Team: Far too many investors want to save money by doing everything
themselves. However, working with a team is unequivocally better than working alone. While you
may appear to save money on the surface, chances are you are losing both money and time by
working alone. That said, align your services with a competent team and trust them to do the job
you hired them for. There’s a good chance they know more about each and every process than
you do.
In this next section, we will discuss how to obtain different types of commercial investment
loans. Being well-versed in the above formulas and calculations is critical when presenting
your case to commercial lenders.
Types Of Commercial Real Estate Loans

(https://www.fortunebuilders.com/how-to-invest-in-
commercial-real-estate-financing-loans/)
Now that you’ve received an overview of commercial real estate investing, including its
benefits and ideas on how to get started, you’ll need to start thinking about an important
aspect: How will you go about financing these investments?
There are a wide range of commercial investment loan types, and it is up to the investor to
decide which financing option best fits their needs. Each type of loan has unique eligibility
requirements, such as a minimum credit score, experience level and down payment
requirement. These loans also have varying terms including the loan term, interest rate,
and loan-to-value (LTV) ratio. For example, one investor may be in search of a loan that
offers lower interest rates over a longer loan term, while another investor’s priority might
be finding a short-term loan as a means of bridging a financial gap. Be sure to visit our
comprehensive guide to the different types of commercial real estate loans shown below:
Small Business Administration (SBA) 7(a) Loan

Certified Development Company (CDC) / SBA 504 Loan
Conventional Loan
Commercial Bridge Loan
Hard Money Loan
Conduit Loan
How To Get A Commercial Real Estate Loan

The idea of obtaining commercial real estate financing may seem intimidating at first, but
investors who spend the time learning about the process and the different types of
commercial real estate loans will find that they are completely attainable. Below are the
main steps involved in obtaining a commercial investment property loan:
Individual Vs Entity: Step one is to determine whether to finance a commercial property as an

individual, or as an entity. Although the majority of commercial real estate is purchased by
business entities such as corporations, developers and business partnerships, it can easily be
completed as an individual investor. The lender essentially wants to make certain the borrower
can repay the loan, thus requiring borrowers to provide financial track records in order to secure a
loan. For newer businesses with no credit history, the lender will typically require the investor(s) to
guarantee the loan.
Mortgage Options: It is important for investors to recognize that residential and commercial
mortgages are not the same. First, unlike residential mortgages, commercial loans are not backed
by government agencies such as Freddie Mac and Fannie Mae. Secondly, commercial loans terms
differ from those of residential properties. Commercial loans range from five to 20 years, whereas
residential loans will typically range from 15, to 30 years. Lenders will typically make their
decisions based on an investor’s financial and credit history.
Loan To Value Ratio: An important metric lenders consider when financing commercial real
estate is a property’s loan-to-value ratio (LTV). This figure measures the value of a loan against the
value of the property, and is calculated by dividing the amount of the loan by the property’s
appraisal value or purchase price. For commercial loans, the LTV will range from 65 to 80 percent,
with lower LTVs qualifying for more favorable financing rates.
Debt Service Coverage Ratio: Lenders also look at debt-service coverage ratio (DSCR). This
metric measures a property’s ability to service a debt. It compares a property’s annual net
operating income to its annual mortgage debt service, including principal and interest. A DSCR of
less than one percent reveals a negative cash flow. Commercial lenders generally look for DSCRs
of at least 1.25 to ensure proper cash flow.
Once you’ve secured your financing, you are ready to start searching through listings.
However, this is a lot of information to process at once. Keep reading to have some of your
most burning questions answered.
Commercial Real Estate For Beginners

A successful commercial real estate investor has the potential to have a very lucrative
career. Many beginner investors use multifamily properties as a gateway to get into
commercial real estate investing. Regardless, it is imperative that you have a proper
business plan (https://www.fortunebuilders.com/real-estate-business-plan/) before getting
started. Here are the answers to a few commonly asked commercial real estate questions
every beginner investor should know:
How Do I Know If I’m Ready For A Career In Commercial Real

Estate Investing?
Are you interested in commercial real estate investing but still feeling a little hesitant to
take the leap? The following three questions were designed to help you gain more clarity
on whether or not commercial real estate is for you:
Do you have the ability to think big?
Investing in commercial real estate requires individuals to think big and have an open
mind. When investing in residential real estate, the properties under consideration are
much smaller in scale. With a commercial property, you must be able to visualize a finished
product even in the beginning stages of redevelopment. If you are debating whether to
purchase a five unit apartment versus a property with ten or more units, it is probably
more beneficial to choose the 10. If the five unit complex requires nearly the same
commercial financing as the 10, it makes sense to think big and do what it takes to boost
your bottom line.
Are you an expert relationship builder?
Networking and building relationships as a residential real estate investor is important, but
it is an absolute must for commercial investors. The biggest reason to build relationships
with other commercial investors and private lenders is for financing purposes. When facing
a one million dollar or more purchase price, it is likely that you will be in need of funding,
and what better way to find capital than to contact one of your personal private lenders
with whom you’ve already built a relationship. Once you’ve built a network, you can rely on
other individuals who have made and learned from their mistakes.
Can you successfully execute your due diligence?
Arguably the most important task beginner investors can do before jumping into
commercial real estate investing is to perform their due diligence. After you’ve chosen your
niche, you must research everything you can regarding that specific sector. Ask questions
from like-minded individuals at your local REI club, find information about different types
of financing options online, reach out to private lenders in advance so you know exactly
what information to present them with when the time comes. Once you’ve carried out
thorough due diligence, you will be ready to successfully embark on your first commercial
real estate deal.
Summary
Commercial real estate investing may seem intimidating at first, but you should understand
that the core skills and competencies required are the same as residential property
investing. They include minding due diligence, having a proper business plan that includes
an understanding of financing options, and being being able to build a strong network. Any
type of investing is associated with some level of risk, and it’s up to you to find ways to
mitigate that risk. If you use have the systems that brought you success with residential
real estate and seamlessly implement them into your commercial strategy, and you will
surely find success.
If you got into commercial real estate investing, which property category would you like to
specialize in? Let us know in the comments below:
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Commercial Real Estate Investing Guide - How to Get Started | FortuneBuilders 11/10/19, 1'22 AM

Home (/) About (/about) Education (/education/) Student Success (/student-success)

Real Estate Investing Strategies (https://www.fortunebuilders.com/real-estate-investing-strategies/)

Commercial Real Estate Investing 101:

Types of commercial real estate

Beneﬁts of commercial real estate

How to invest in commercial real estate

Loans for commercial real estate

Commercial Real Estate Investing Trends In 2019: What’s

What Qualifies As “Commercial Real Estate?”

The 5 Types Of Commercial Real Estate

Multifamily properties are comprised of apartment complexes, high-rise condominium

What Is Owner Occupied Commercial Real Estate?

The Many Benefits Of Commercial Real Estate Investing

A commercial redeveloper can also take advantage of the following beneﬁts:

How To Invest In Commercial Real Estate: Getting Started

1. Understand How Commercial Real Estate Is Di!erent

Location is an important factor regardless of your investing niche, with commercial

3. Use The Right Success Metric

4. Commercial Real Estate Investing Mistakes To Avoid

Types Of Commercial Real Estate Loans

Small Business Administration (SBA) 7(a) Loan

How To Get A Commercial Real Estate Loan

Individual Vs Entity: Step one is to determine whether to ﬁnance a commercial property as an

Commercial Real Estate For Beginners

How Do I Know If I’m Ready For A Career In Commercial Real

Do you have the ability to think big?

Are you an expert relationship builder?

Can you successfully execute your due diligence?

REAL ESTATE INVESTING See All !

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