Key Factors to Keep in Mind before Investing in Commercial Property

  • @kw
  • 08 Jun 2022

Are you planning to invest in real estate? Do you seek help in choosing the best-suited option? Well, in that case, look no further as you are at the right place. Here, it is essential to understand that investments can be both simple & tricky. However, the usage of your resources, time, and effort will depend on the complexity of the chosen mode of investing.

If you are thinking of a long-term investment, considering real estate is a good alternative. Commercial real estate property is one of the popular types of real estate investments. In this article, we will help you understand how commercial real estate functions and how it can help you enhance & expand your investment portfolio.

Why Should You Invest in Commercial Real Estate?

An investment in commercial real estate usually involves a substantial sum of money, which is difficult for a single retail investor to offer. Real Estate Investment Trusts (REITs) and fractional ownership are the most usual ways to invest in commercial real estate (CRE).

This type of investment makes CRE more accessible to ordinary investors by minimizing the ticket size. However, understand that a smaller ticket size does not always imply a smart investment opportunity.

Glance through the benefits of CRE investment over other traditional options: 

  1. It is secure from price fluctuations because it is real estate. It is a stable long-term way of investing with a consistent rate of return.
  2. It has a lock-in period that shields your investment while guaranteeing returns.
  3. Any specialized CRE in a strategic location can be a gold mine because it will be widely valued by a particular section of renters, assuring that the investment will continue to pay off as a passive income stream.

Steps to Get Started with Commercial Real Estate Investment:

Individual investors can invest in commercial real estate. Nonetheless, the high cost makes it nearly impossible for a single investor to make the minimum investment in a commercial real estate firm.

REITs or fractional ownership is a highly preferred method of investing in commercial real estate.

  1. REITs: It can be said that these work similarly to mutual funds. A REIT is managed by fund managers that are split across various assets; and, your investment is part of a larger investment pool. The fund managers choose these holdings based on their historical performance and economic trends. The assets\' returns are combined and allocated to investors based on their REIT fund ownership.
  2. Fractional Ownership: This technique facilitates a group of like-minded investors pooling their funds to purchase an asset. Generally, the lowest ticket size is in multiples of lakhs. Independent retail investors can hold one or more fractions of an asset, giving them a part of the ownership, depending on their risk appetite & capital. Rent along with capital appreciation returns are handed out in proportion to every investor\'s ownership stake.

The primary difference between the two models is that a portion of your investment in a REIT could be idle in a property that does not find tenants for some purpose. The best method to avoid your investment from becoming an expensive paperweight is to withdraw fully from the fund.

On the other hand, Fractional ownership provides you the total authority over the property you choose. You can still invest in other profitable assets while selling or trading your ownership share of non-performing assets for exchange in fractional ownership.

Guide to Proceed with Goal-based Commercial Real Estate Investment:

Goal-based investing operates in an identical way to other traditional investment approaches. CRE is an excellent long-term way of investing. Thus, if you\'re searching for something to invest in for less than three years, you should probably go beyond.

Long-term investments have broader, better-planned goals that are spread over five years or multiples of the same. Commercial office space followed by warehouses is the most widely available alternative for investing in CRE. The uncommon version can be found in labs, manufacturing plants, and production lines.

  1. Office Spaces: If the company does not have a corporate headquarters, office space is usually a good investment lasting four to five years. In such situations, the lease term could be extended up to ten years, with the option of a further renewal at the tenant\'s discretion.
  2. Warehouses: General-purpose warehouses are utilized to retain products in transit. They serve as a supply center or assist a typical industrial unit. If the tenant is a well-established e-commerce operator with a strong local presence, you can be assured of the investment\'s long-term viability, like 15 years. Otherwise, most warehouses have a five-year lock-in period and an 11-12-year lease term.
  3. Laboratories, manufacturing units, and assembly floors: Tenants never abandon the last group of manufacturing, research, & industrial spaces. The only chance you can invest in commercial real estate property is when new assets become available or when a tenant agrees to sublease a piece of the property. The ownership is rock-solid, with tenancies spanning 20 years or over. Rental returns are regular, while capital appreciation is consistent.

You can invest in these subclasses depending on your ideal financial aim, according to what you\'re searching for. So, make sure to consider these vital factors before spending your money.


KW Group's Anthem.

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