When investing in commercial real estate, the first thing you should consider is the type of investment you want to make. There are many different types to consider, each with pros and cons. Here are 10 common ones to consider:
1. Mixed-Use Buildings
In crowded cities and main streets across America, mixed-use buildings are used for a combination of retail, office, industrial, institutional, cultural, and residential purposes.
Usually, you’ll acquire such a building with a loan designed for mixed-use construction. Before pursuing this route, thoroughly read through this excellent guide to property development loans and mixed-use development so you understand the benefits, disadvantages, and terms of this type of financing.
Then, you can collect the profits from different entities that rent from you. It’s a great way to try out commercial investing, although it can be somewhat challenging to market the units and maintain full capacity.
Although most amateur investors don’t consider a hotel, experienced investors often want this large purchase in their portfolio. It can be a highly profitable venture that comes with high esteem in the industry.
A hotel investment has considerable risk as well as hefty capital initially. It takes a lot of work and a dedicated team to get a hotel up and running, so it’s not for the faint of heart.
3. Office Buildings
Office buildings for rent are needed in large and small sizes. The smaller buildings obviously come with less maintenance and liability than the larger buildings, but they also come with a smaller monthly profit. You’ll want to consider your current abilities as a landlord and stomach for risk when deciding between a small or large building to rent out.
Business owners can typically make more money if they don’t have a mortgage over their heads, so they opt to rent a retail space rather than buying their own. You can benefit from their interest in a rental with the right property in a great location. Rentals on a busy main street can go for top dollar, putting plenty of money in your pocket.
Retail markets can rise and fall, however, increasing your risks of vacancies. When the market in a city falls, your building may sit vacant for years, leaving you with a mortgage bill rather than profits every month.
Manufacturing and warehousing needs are a special-use category that require large, sterile buildings with customizable machinery. In some cases, you may be required to provide that machinery to appease your tenant, which can get costly and require some liability.
On the other hand, many industrial lease agreements absolve the owner of any potential liability on the property and require nothing from the owner. They just get to collect rent every month.
Garden apartments, midrise apartments, high rise apartments, and other multi-family dwellings are exceptionally popular in overly populated areas. If you’re in a market where a centrally-located apartment is worth more than the homes in suburban areas, you can make a killing with these investments.
On the other hand, multi-family buildings are a lot of work and contain plenty of risk. They’re expensive to maintain and secure, and there are always liability risks to consider. An iron-clad lease agreement, excellent staff, and filled vacancies are essential to making these units work.
Storage, particularly self-storage, is a booming commercial real estate entity with many applications. In many cases, it’s a low-risk, low-maintenance venture. It can also yield high returns with very little work.
In other cases, it can be an expensive investment, particularly if there are increased security or maintenance concerns. For example, if you live in an area with high crime rates and plenty of vandalism, you’ll need expensive security systems in place and maintenance workers to make repairs when necessary, which will eat into your profits.
8. Empty Lots
Empty lots of land can be sold to developers, construction companies, or individuals looking to build on the land. It’s a simple transaction if you find the right fit, but if the land is in an uninhabitable area or in an undesirable part of town, you may have a difficult time selling it.
There are very few plots of land that are unowned anymore, and farmers must often rent farmland from others in order to expand their crops or house their livestock.
The advantage is that you collect money on land that’s otherwise left unused, but the disadvantage is an increased liability. You’ll also want to be careful that they don’t use the land for illegal purposes, such as growing marijuana in a state where it’s not legal.
10. Special Purpose
It might surprise you what people can use property for, whether it’s to create a nursing home or to build a community center. These special purpose lots can be in high-demand depending on the market, which is great for attracting renters or buyers. However, if the market isn’t accepting of a special property, you’ll be hosting an investment with very little value. Consider the pros and cons carefully before diving in.