How to Invest in Commercial Real Estate

Posted on June 12, 2021 by Speed Commercial Real Estate

Commercial real estate investments are among the investments with a high ROI. People who invest in commercial real estate have financial and psychological rewards as many of them see their investments as a fulfillment of their dreams.

Commercial real estate includes all properties constructed or used for business purposes. The properties may be owner-occupied, meaning the owners operate their businesses on the properties. Some owners opt to lease the property to tenants to run their businesses on the property.

These properties range in size, from small neighborhood stores to city skylines. They include all the income-producing properties and those with the potential to generate income.

However, deciding to invest in commercial real estate comes with its fair share of challenges, especially for beginners. In this guide, we will take through how to invest in commercial real estate. Let us begin by discussing the types of real estate investments you could consider.

Types of Commercial Real Estate Investments

Multifamily

This investment is popular with investors transitioning from residential real estate investments. They range in size from small properties with two tenants to those with hundreds of units. They include:

Garden Apartments

These are usually a collection of apartments spread out within one property and sharing amenities and a yard. They are common in suburbs, with about three to four-story walk-ups housing about 50-200 units.

Mid-Rise Apartments

These have about 4-11 stories with 30-200 units. You are likely to find them closer to the urban centers and may have elevators and garage parking.

High-Rise Apartments

These investments are common around the Central Business District of large towns and market centers. They offer amenities such as garage parking and elevators and may house hundreds of units.

Senior/Assisted Living Properties

These are the properties built to provide housing for the aging and senior citizens. They offer more support to tenants than other multifamily properties. Tenants are likely to get in-house or on-call medical care, meal service, and housekeeping.

Office

Offices may be among the most capital-intensive commercial real estate investments, but they also have one of the highest ROIs. They include:

Central Business District (CBD)

You are likely to find them housing the largest organizations such as banks, supermarkets, and telecommunication companies. Most organizations prefer them due to their convenience in location. Clients can find and walk to them easily. They vary from mid to high-rise apartments with controlled parking and building naming rights.

Commercially Zoned Homes

These are usually stand-alone properties. They are popular with law firms, medical practitioners, and accounting firms. Commercially zoned homes allow them to escape from the frequent interruptions associated with apartment-like office spaces.

Medical Offices

These are among the most stable and valuable office spaces designed to meet the needs of the medical field. The properties require special amenities like wider elevators, more plumbing, and standby generators. The leases are usually longer, taking between 7-10 years. They vary in size, housing any medical-related business. These range from a local dentist, optician, to a large hospital and surgery center.

Suburban Offices

Suburban offices are usually mid-rise buildings scattered on a shared property with common amenities. They are not amenity-heavy. Some may offer serviced parking.

Industrial

Warehouses

These are the largest industrial properties. They may house regional distributors. When designing them, you have to make room for trucks that require space for entering and exiting these properties.

Manufacturing

Manufacturing zones are usually isolated. They use heavy, noisy machinery, chemicals, and are heavy on power consumption. You have to customize them to fit the needs of the tenants. They also have long leases that may run for 7-15 years.

Showroom

Some showrooms double up as distribution centers for manufacturers. They require more visibility and should therefore be located in visible spaces with high human traffic.

Storage Spaces

Some tenants may require temperature-controlled storage spaces. Business owners use them to store merchandise for a short time as they look for space to set up shop. They are also popular with families that use them to keep their mementos. The storage units could be indoors or outdoors, depending on the nature of materials the tenants want to keep there.

Retail

Retail properties vary from neighborhood shopping centers that house several retail shops to pharmacies and restaurants that may occupy stand-alone properties. Regional malls and power centers also fall under this category.

Hospitality

Hospitality properties include full-service, limited service, budget, and extended stay hotels. Some, like VRBO and Airbnb, offer short-term rentals.

Now that you know the options from which you can choose when you invest in commercial real estate, let us explore the steps you need to take to undertake your investment.

Steps to Take in Order to Invest in Commercial Real Estate

Study the Industry

You will rely on professionals to guide you in most of your investments. However, you should also be knowledgeable in the commercial real estate industry. Take time to search the internet and talk to professionals in commercial real estate investment. Learn as much as you can so that you can think and act like an insider when you begin your investment.

Some commercial real estate terminologies that will guide you include Net Operating Income (NOI). This refers to the balance left when you deduct expenses from your gross income on a commercial property. Understand the cap rate of the property you intend to invest in. This is the net present value and future cash flow of income-producing properties.

Develop Your Investment Plan

Your plan will be guided by the amount of money you are willing to invest. Assess your financial strength and find out how much loan you can qualify for if that is the source of your funds.

At this stage, determine if you are investing individually or collaborating with other people.

This is also a perfect time to decide if you want to purchase a ready property or construct from the ground.

Your plan should also include the professionals you will be working with, which will depend on the kind of property you want to invest in.

Decide Which Kind of Commercial Real Estate Investment You Want to Make

This is where you decide the type of investment you want, the size, and the location. At this stage, you also determine if you will make a one-off investment or spread it within a period, especially if you decide to construct from the ground.

Carry Out Neighborhood “Farming“

Neighborhood farming entails visiting the neighborhood to determine the market value of similar properties in the area. In this visit, you may identify the commercial property you want to invest in and negotiate a deal. Ensure you do due diligence on the property to ensure you are getting a clean deal.

Be open-minded when searching for a property. Use the internet and classified ads to help you find properties on sale. Or, hire bird dogs to identify valuable commercial properties for you.

Hire an Agent

Whether you hire professionals like Speed Commercial Real Estate when searching for a property or after you have identified it, ensure you are in charge of the purchasing or construction process. Do some background checks on the agent to know the type of clients they have dealt with before. Also, find out how long they have been in operation and the kind of deals they have handled.

When interviewing the agent, be open about what you want when you invest in commercial real estate. Meet with a number of them and eliminate them to remain with the one who will be the best fit. Asking around also helps in identifying the commercial real estate investment agents.

Working with an agent may help you identify the right property faster. It’s perfect for those who want their buying process to remain confidential and private. An agent may negotiate a better deal for you, especially if you are new in the commercial real estate investment game.

Understand the Underlying Risks of Choosing to Invest in Commercial Real Estate

Your risk profile will determine the best strategy to use so that you can avert losses. However, you must know that every investment in commercial real estate comes with risks.

Remain Focused

You are likely to get advice from different players. You will also learn about the latest trends, and all these may confuse you if you are not focused on your plan.

Additionally, you may consider making some adjustments if they add value to your investment. However, do not leave too much room for that. Discuss any adjustments with the professionals with whom you are working.

Avoid Making Emotional Decisions

Commercial real estate investment is a rational decision. Avoid letting your emotions interfere with the process. If you are not sure about something along the way, take time to think through it and discuss it with other stakeholders.

Invest in Commercial Real Estate with Excellent Support

Are you looking for a reliable and affordable commercial real estate agent? Get in touch with Speed Commercial Real Estate for CRE investment opportunities.

At Speed Commercial Real Estate, we have firsthand knowledge of the level of care our clients need when they invest in commercial real estate. We work closely with several associates and advisers to give you the best commercial real estate investment advice. With our experience, we guarantee you the best services and guidance to ensure your commercial real estate investment is a success.

Commercial Real Estate Terminology

Posted on February 10, 2021 by Speed Commercial Real Estate

If it’s your first time entering the commercial real estate market, you’ve likely been confused by a number of terms that you’ve heard. Like any profession, the commercial real estate world has its own set of lingo. You’ll need to understand it if you’re going to get the best deal. This is true whether you’re looking to acquire a new space or lease out one that you already own. In this post, we’ll cover the commercial real estate terminology that you need in order to make informed decisions. Use these terms to have meaningful conversations with commercial real estate professionals.

Commercial Real Estate Terminology

This first set of terms will include all of the most common words and phrases you’ll hear when discussing or researching commercial real estate investments. We’ve broken them down into logical groupings to make it easier to read. You can also find what you are looking for quickly if you are here for a specific term.

Financial Terms

Some of the most confusing parts of real estate terminology are those related to finances. Although several of these terms are familiar to anyone who runs a business, there are some that are unique to real estate.

Net Operating Income

This is a simple valuation metric for a property. It consists of the property’s income minus its expenses. When counting expenses, mortgage payments and other debt service fees are not included. It is a metric purely of property expenses, so the NOI of a property does not change when the underlying loan does.

Capitalization Rate

The NOI metric makes it easy to determine how well a property is doing independently of factors that will change when ownership does, but it doesn’t provide a full picture. By dividing the NOI by the market value of the property, the capitalization rate gives a better picture of what a potential investment is worth. You may also see this term abbreviated as cap rate.

Cash Flow

Sometimes, you want to know exactly how much money a property is generating. While the NOI metric we’ve discussed so far leaves out mortgage and debt expenses, cash flow adds those expenses into the equation. NOI is used to remove the previous owner’s loan information from the equation, and cash flow is used to account for that of the new owner.

Cash On Cash Return / ROI

Once you have your cash flow figured out, you can use it to calculate how quickly you’ll get your investment back. Your cash on cash return, or return on investment (ROI), is the cash flow of the property divided by the total cash you’ve invested. The cash invested includes the down payment and any additional fees that were paid.

Cash Out Refinance

By increasing the NOI on a property, investors can refinance the property at its new, higher value. Doing so allows them to pull out the original down payment, so they can pay off investors while still retaining ownership of the property. This is a common technique in the commercial real estate market.

Debt Service Coverage Ratio

This is also called the debt coverage ratio or debt to income ratio. This is a metric used by banks to determine how much money you will have leftover after you’ve paid them. It is calculated by dividing your NOI by your annual debt. A DSCR of 1.0 would mean every penny of your income is going to cover your debt. To ensure that a loan is lendable, banks like to see a DSCR of 1.2 or higher. This lets them know that you will be able to easily afford your payments and not just be skating by month to month.

Building Classes

As you search for your commercial property, you’ll come across buildings rated by class. These rating will let you know what kind of condition the building is in.

Class A — These are top-of-the-line buildings. They are newer construction in high-value areas of town. You can be assured that a Class A building will be in pristine condition, but the price will be high.
Class B — These buildings are a little older and may need some minor upkeep. But, they are sound properties that you can expect to be in passable condition.
Class C — These buildings are fixer-uppers. They can be expected to be older buildings that need work done to restore them to their former glory.

Types of Lease

Learning the terms and conditions of a lease is an important part of understanding commercial real estate terminology. It will help you be able to compare the options available to you.

close-up-of-commercial-real-estate-agent-passing-keys-to-client-who-is-holding-lease-agreement

Full-Service Lease

With a full-service lease, the tenant will pay the landlord a single fee and the landlord will pay for everything else. This includes taxes, utilities, repairs, insurance, and other expenses.

Triple Net Lease

The various net leases shift some financial burden to the tenant. Under a triple net lease, tenants must pay taxes, insurance, and maintenance. The other types are grouped together under modified gross lease below.

Modified Gross Lease

This is an umbrella term for double net leases, single net leases, or any other type of lease where clients and landlords split responsibility for payment. With double net leases, landlords pay for maintenance, and single net leases are when landlords pay for everything except taxes.

Ground Lease

This is a leasing arrangement where the tenant owns the building, but leases the land that it is on. Because of the unique situation these leases present, they often have very long terms and options to renew.

Other Real Estate Terminology: Lease Terms

Understanding your leasing options will require more than just knowing what the type of lease is. The terms below explain what you are expected to pay and what you’ll be getting in exchange for that payment.

Base Rent

As seen above, some leases require additional fees to be paid by the tenant. The base rent is the amount you’ll be paying solely for rent. Any taxes, insurance, or maintenance fees that may be applicable are not included in this figure.

Usable Square Footage

This is often used in relation to office space. This figure tells you exactly how much space will be exclusively for you. Lobbies and other common areas are shared commercial space that you’ll technically have access to. However, they aren’t very useful in knowing what you can do with a space. The usable square footage figure excludes those areas.

Per-square-foot Rent

When looking at properties of varying size, comparing base prices is a lot like comparing apples and oranges. Divide the rent by the square footage. This way, you’ll have a more accurate picture of how the different properties compare in price. This figure is almost always provided for you, so you won’t need to do the math yourself.

People to Know

Being able to use this real estate terminology doesn’t mean a lot if you aren’t talking to the right person. There are a number of professionals involved in the commercial real estate business. This list will help you figure out which ones you need to be talking to for your specific goal.

Property Manager

Landlords rarely handle the day-to-day operations of managing their properties themselves, especially if they own many properties. A property manager is someone who is paid by the landlord to handle those responsibilities. In addition to the day-to-day operations and maintenance duties, property managers will find renters for vacant space and ensure that prices are competitive with the market.

Real Estate Agent

A real estate agent is a real estate sales professional that has passed the certification in their state to use the title. Each state has different requirements before someone can use the title of real estate agent, but real estate agents in all states are licensed professionals.

Leasing Agent

When a property owner decides that they want to lease out their property, they need a real estate professional to help them through the process. This is the job of the leasing agent. They help determine an optimal price for your property, work on your behalf to collect rent and provide customer service, and facilitate sales by posting listings and giving tours.

Real Estate Broker

If a real estate agent wants to take the next step in their career, they can pursue further training and become a real estate broker. Again, each state’s requirements are different, but real estate brokers have a more in-depth knowledge of the real estate business than agents do. The extra training includes topics such as real-estate law, insurance, and ethics. You may hear the terms principal broker, managing broker, and associate broker. These terms represent a broker’s rank at their brokerage, in descending order.

Tenant Broker

Just as a listing agent helps people seeking to lease out their properties, a tenant broker helps people looking for properties to lease. They will be able to explain the current real estate market, help you find properties that match your needs, and negotiate the best deals for you.

Real Estate Terminology is Easier with Professionals

Even when you know the common commercial real estate terminology, dealing with real estate can be confusing. The complexity of commercial real estate makes it even more confusing. Whether you are using your new property as an investment or as your next headquarters, getting the right deal can make a big impact on how successful you are. If you need advice for your next real estate deal, we invite you to contact a representative from Speed Commercial Real Estate today.

How Will Coronavirus Affect the Real Estate Market?

Posted on July 13, 2020 by Speed Commercial Real Estate

When the coronavirus pandemic hit the United States, it had immediate and serious impacts on the country’s economy. The real estate market, in particular, has felt the widespread effects of the pandemic. It’s struggling to find its footing in the months after the initial outbreak. The pandemic and resulting quarantine led to job loss and social distancing, which made buying and selling properties tougher. At the same time, real estate, especially commercial real estate, is notably resilient. While this particular type of economic recession is pretty unprecedented in the United States, we can make some predictions about the future of the real estate market and what recovery will look like in the coming months and years.

How COVID-19 Has Already Affected The Real Estate Market

The coronavirus pandemic has affected many facets of the US economy. And in uncertain economic times, people tend to put off making bigger purchases. Millions of Americans filed for unemployment in the past few months after being laid off or having their hours reduced. Businesses all over the country have felt the impact of Americans’ lessened spending. Many people and businesses just don’t have the financial stability needed to purchase a property right now.

Decreased Demand

In the early days of the virus, real estate websites like Redfin and Zillow saw serious drops in their web traffic. People were putting their search for a new property on hold. This makes sense, and not only for financial reasons. Buying a house involves close contact with real estate professionals, which makes social distancing difficult. While some states are easing up on virus-related restrictions, certain areas of the country are still seeing a rise in cases. Therefore, what’s true of the real estate market in one area of the country may vary in other areas.

Mortgage Rates

To prevent a collapse in the housing market, the federal government issued a moratorium on foreclosures. In addition, the pandemic drove mortgage rates lower. Though this is good news for someone who currently has the finances to buy a house, for some people, it may be more difficult to get mortgage credit. Many lenders now offer tighter restrictions on mortgages, like bigger downpayment requirements and higher credit scores.

Commercial Market

commercial-real-estate-market-property-with-orange-brick-pillars-and-white-wood-paneling-near-empty-parking-lot

On the commercial side of the market, many small businesses and restaurants have already vacated their properties because they’ve lost out on so much business since March. And even bigger corporate chains have been struggling to pay rent. Many are using this period of flux as an opportunity to negotiate lower rent prices or renegotiate their leases.

What Can We Expect in the Coming Months?

It’s clear that both the commercial and residential real estate markets have been deeply affected by coronavirus. In the commercial sector, around the country, millions of construction projects were suddenly halted and properties were vacated. And on the other side of the coin, e-commerce retailers have been booming, which is going to make recovery more complicated. Real estate websites have seen increased traffic and the housing market is already starting to climb. However, there are still social distancing restrictions in place. They might be in place for the foreseeable future. But real estate is historically a reliable and safe investment, especially in times of economic uncertainty.

With many people working remotely, this could also affect both commercial and residential real estate. When people work remotely more, they care less about the distance between work and home. This means people have more freedom about where they choose to live. Cheaper areas of the US may see an influx of home purchases as remote work becomes more common. We can expect the housing market to recover slowly but steadily.

In addition, businesses that have remote employees may need less physical space in the offices or may choose not to have a physical location at all. However, remote work is still brand new for many businesses. It’s unlikely that the shift away from physical locations will be sudden or rapid. With this in mind, some businesses may opt for more office space or different layouts when their employees return to the office. They will place health and wellness at the forefront of this strategy. Employees are much less enthusiastic about working in close quarters when social distancing has been engrained into our lives. So some companies may be looking to expand in order to help ease their workers’ minds about spreading illness and increase productivity among their staff.

What Does The Future Hold For the Real Estate Market?

It’s impossible to predict the future course of the coronavirus and its resulting economic troubles. However, the real estate market is often known for thriving independently of the rest of the US economy. Innovation and creativity are needed during uncertain times to keep the market afloat, but the real estate industry is constantly innovating. Projects that were under construction and halted are being redesigned to meet the needs of future tenants, and plans are being redrawn.

We can expect to see new projects focused on social distancing, keeping people healthy, and providing them the amenities they need close at hand. Health and safety are at the forefront of everyone’s minds. Thus, amenities like air purification, water filtration, and strict cleaning protocols will likely boom in popularity, at least for now. However, when a coronavirus vaccine hits the market, the trends may change again. The biggest trend for the future of real estate is awareness and cognizance of the needs of the people the market is serving. After the coronavirus pandemic becomes a memory, the real estate professionals that come out on top are the ones who react quickly to a changing market and pay attention to trends.

Though the next few months are uncertain, now is not necessarily the time to shy away from real estate investments. Strive to make well-researched and smart investments. Avoid areas that were hit hard by the virus, and instead, look for historically strong markets.

3 Reasons To Invest In Commercial Real Estate

Posted on April 29, 2020 by Speed Commercial Real Estate

While the stock market appears to have the glamour and action, with prices rising and falling by the hour, it’s really quality real estate investments which have the power to perform during any market condition, bull or bear. People further argue that stocks and bonds have the edge over real estate investments, thanks to their liquidity, but that theory of liquidity simply doesn’t hold water, if you don’t mind the pun.

Granted, liquidity can be of value for those investors uncertain about their decisions. Liquidity is your escape hatch when an investment sours or no longer meets your financial needs and goals. Unfortunately, all too often, by the time you are opening that escape hatch, the bad news has hit the streets which is reflected by a plummeting price. Then the game becomes about getting out before others.

This is not at all the game which commercial real estate investors prefer playing. They are more into winning from step one, and continuing to cash in on their astute choices month in and month out, thanks to the reliable rental and lease revenues which commercial real estate is capable of generating.

The Three Reasons You Need Commercial Real Estate

While every investment offers certain benefits, when you compare the reasons why astute and experienced investors regularly seek out commercial real estate properties as investments, you will better understand the logic behind making this type of commitment. And you will likely find yourself more excited and motivated to pursue commercial real estate because, as you will see, those benefits really pay off!

Reason #1: Tax Advantages

Whenever you earn dividends on stocks or interest on bonds, you are required to declare those earning on your tax return and pay taxes on them, according to your tax bracket. With tax brackets as high as 37%, you could see a good third of your investment income from stocks and bonds go right into the pockets of your local and federal government.

With average stock yields offering an unexciting 2.22% annual return and bond yields of 5% per year, knocking off a third of those returns brings you down to returns of 1.40% and 3.15% after taxes, but before inflation. With US inflation on pace to run 2% per year for the next few years, your stock returns don’t even keep up and the bonds are barely staying ahead of the inflationary curve. (By the way, the reason bonds offer higher yields is that there is minimal or no upside growth potential on the bond principal; annual interest payments are what bondholders rely upon.)

In comparison, when investing in quality commercial real estate investments, you can shelter most, sometimes all, of your real estate revenue. In fact, in the early years, if played right, you can save taxes and get a tax-free income stream with a paper loss on your commercial real estate investment; that is simply something a stock or bond cannot do!

Reason #2: Reliable Revenue

When you buy stock, you are buying shares of a company which works to generate profits for its shareholders. Unfortunately, those profits are beyond your control; if the CEO of the company whose share you own is awarded a hefty “performance” bonus, that comes out of your pocket in the form of reduced dividend payments. Ironically, that same CEO, when the company doesn’t produce profits or dividends, is still paid a sizable salary and often still gets a bonus!

If you view a commercial real estate venture as a type of business, which has employees and generates revenue, the powerhouse making your money is not a highly-paid executive or group of employees, but instead is a tangible property. Better than bonds, where interest rates are fixed for long terms of time, real estate rental agreements and leases are typically structured as short term contracts, which regularly renew with increases in rental or lease payments. Even long term commercial property leases often factor in regular lease increases to reflect anticipated inflationary increases.

So not only are you sitting on a reliable revenue stream, but it adjusts for inflation, often notching up faster and higher than the actual cost of living is rising.

Reason #3: Superior Growth

While stock prices can fluctuate wildly, particularly during economic periods of uncertainty, commercial real estate investors are blessed by a quieter, less volatile, marketplace. As a matter of fact, stock prices rarely reflect the actual value of the company, but infers value based upon potential, promises, and hopes. In other words, the stock market is often pushed about by emotions, which causes dramatic rises and falls of fortunes beyond the control of the investor.

It’s just the reverse when it comes to commercial real estate investments. Because there are not daily postings of the “value” of a commercial real estate investment (which reflects more than the intrinsic values of the property), determining a realistic and fair value of a property is based upon formulas, not feelings.

Two formulas in particular remain popular and reliable methods for gauging the value of a commercial property:

Capitalization Rate

Also called a “cap rate,” this determines actual investment return (as a yield percentage) by dividing the net annual income by the original purchase price. For instance, a property for which you paid $1,000,000 and is generating a net income of $75,000 per year would have a 7.5% cap rate (75,000 divided by 1,000,000 = 0.075, or 7.5%).

If you held that property for 20 years and your net income rose to $150,000 per year, your cap rate (or investment return) is now 15%. However, if you decide to sell this property at that original 7.5% cap rate, your property would list for $2,000,000, or a doubling of your investment.

Gross Rent Multiplier

Also called a “GRM,” this is a more simplistic approach to determining value, as it is based solely on gross rental revenues, without factoring in operating expenses to determine net revenue. For the astute investor confident about effectively managing commercial real estate operating expenses, purchasing on a GRM evaluation is an acceptable approach.

The formula for determining the GRM is simple: divide the asking (or purchase) price by the gross rental revenue, and the result is the GRM. If we use the same example as above, where you paid $1,000,000 for a commercial property, here is how you would calculate its GRM for that purchase price:

We will assume that gross rental revenues run $150,000 (operating expenses of $75,000 produced the $75,000 net income in the Cap Rate example above)
Since you paid $1,000,000 for this property, divide $1,000,000 by $150,000
The result is 6.67, which is the GRM if purchased at $1,000,000

By the way, if you are a savvy investor and can negotiate a $900,000 purchase price, your GRM drops to an even 6.

The rule to remember is you want to purchase properties with the highest cap rate and/or lowest GRM.

Finally, as to future value. It is great to say your property is worth $2,000,000 on paper, but it’s unlikely you will find another solid investment capable of producing the 15% return you are now earning. While investors in stocks and bonds are usually trying to watch for a good selling point, with the phenomenal rate of return you receive, you have no motivation whatsoever to sell and get into “something better.” You already have the best investment with commercial real estate in your portfolio!

Commercial Real Estate Opportunities in Jackson, Mississippi

Savvy investors in America and around the world find the commercial real estate opportunities in Jackson, Mississippi both exciting and profitable. This state capital, with a population of under 200,000 citizens, offers beautiful commercial properties with exceptional cap rates, much higher than the national average.

At Speed Commercial Real Estate, Jackson is our own very backyard which we have worked assiduously and thoroughly for more than a decade and a half. As specialists in commercial property sales, we are also active managers of multiple properties, including office, retail, and industrial warehouse spaces.

For the discriminating investor demanding an above-average return with below-average risks in the commercial real estate sector, our expansive list of properties can very well meet your specific desires. Call us today and we’ll help you uncover a property gem capable of amazing income and growth returns.