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Commercial real estate investing is all about how hungry you are for specific product types. This desire will, in many ways, be fueled by your aversion to risk.
How much risk do you think you can chew?
If your risk comfort level is low, multifamily commercial investment is likely your best route.
My definition of multifamily for the sake of this conversation is rental housing with a minimum of eight suites.
If low to stable vacancy rates support the return on income, this type of product is certainly the least risky.
Even if a suite or two goes vacant for a prolonged period, there should be enough income flowing in to service the debt and manage expenses.
With any type of investment, though, the lower the risk the lower the return.
Because of the stability of multifamily investments, be sure to expect lower capitalization rates in healthy markets.
Strong desire
If you’re financially positioned to take on a little more risk, a commercial property with multiple tenancies may be in your wheelhouse. This could be a retail strip mall or perhaps an industrial complex with several tenancies.
Investigate the current market vacancy rate. It’s a good indicator of the level of risk associated with the type of investment you’re considering.
In markets with relatively low vacancy and not a lot of new construction, the odds are in your favour that you will be able to maintain the current occupancy.
An investment of this type will require a thorough review of leases, including the lease expiry dates. There are several items in a lease that can strengthen or weaken the value of a tenancy.
Having a commercial real estate professional review these on your behalf is prudent.
Starvation mode
You need to park your money somewhere and you can weather a loss if the occasion arises. You’re ready to look at single-tenancy properties.
These types of investments can often have higher returns, but you need to feel confident about your tenant in this type of property. The financial depth of the tenant is a huge deciding factor for buyers.
What if the tenant leaves at the expiration of their lease? Does the building lend itself to a good variety of other users?
You may want to factor in carrying costs, or what you’ll have to invest into the property if you need to go to market with it eventually.
This is big-league investing and preferably for those with deeper pockets.
So how hungry are you?
I’m only really scratching the surface with the ins and outs of commercial real estate investment.
There are many ways to construct deals in our industry but some of the most pertinent advice I can give prospective investors is to educate themselves and use the right professionals to guide them along.
Your appetite for risk will determine what you’re comfortable purchasing and when the time is right.
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