Commercial Real Estate Investment Basics

Commercial real estate is a broad term describing any non-residential property used to generate a profit. Some examples of commercial real estate include office buildings, industrial parks, medical centers, hotels, malls, apartment buildings, parking structures, and warehouses.

Although investment strategies for commercial real estate are fairly simple on the surface, many investors don’t fully understand how commercial real estate can work as an investment vehicle.  Commercial investors typically make money in one of three ways:  Through rental income, by purchasing or leasing the property and charging tenants rent in exchange for use of the property, through appreciation in the value of the held property over time, and by brokering or negotiating a deal between a buyer and a seller of the commercial property.

In this article, let’s examine the first of these commercial investment strategies a little more closely.

 

Rental Income

 

  • Offices, office space/cubicles etc.:  A typical tenant might be a marketing firm or sales company or telemarketing company.  The company pays the rent and has lease terms, often in the five to ten year range.

 

  • Apartment Buildings: Apartment buildings, whether multi-use or multi-family, typically have individuals, families or even companies as tenants. Leases can be short term or long term. Most are not longer than a year and some can even be month to month. These buildings can have several tenants and leases to manage and account for each month.
  • Industrial: Warehouses, garages, refineries and factories, etc.: A typical tenant might be a manufacturing and/or distribution company or mechanic or machinist. These properties aren’t generally located in areas that would be very desirable for residential or retail properties. Lease lengths are typically longer terms of five years or more.