Investing In Industrial Real Estate
Industrial real estate encompasses warehouses, flex space, logistics, and fulfillment centers. According to the to the Urban Land Institute in its 2020 Emerging Trends in Real Estate report, interest in industrial real estate investment has remained robust: Todays buyers see further potential for long-term gains, built on the structural trends that have driven recent outperformance The outlooks for both operating conditions and investment trends lean positive. In particular, last-mile distribution centers continue to be a source of much investor interest given their integral part in e-commerce competition. Experts estimate that for each incremental $1 billion in e-commerce sales, another 1.25 million square feet of distribution space is needed. This trend has only been accelerated by the COVID-19 pandemic, which has bolstered online sales for nearly every consumer segment.
Diversification across property types can help reduce overall real estate portfolio risk and enhance returns.
What Is A Real Estate Investment Group
A real estate investment group refers to a business that focuses the majority of its efforts and capital on real estate. In search of profits, real estate investment groups may choose to buy, renovate, sell, or finance properties. Real estate investment groups commonly buy out multi-unit properties, selling units to investors while taking responsibility for administration and maintenance of the property.
Typically, real estate investment groups either do not elect or do not qualify to be a real estate investment trust .
Pros Of Investing In Commercial Property
Corporate properties tend to be secure investments, especially if you purchase one that already has a business in situ. If you arent buying with a business in situ, youll need to do some extra research to make this a successful strategy.
Commercialletsdont involve as much work as a traditional let. Leases tend to span multiple years and are usually fully repairing and insuring. If youve got a tenant with a good business the income is quite passive.
If you let on a fully repairing and insuring basis, youll save money on insurance and maintenance.
There are tax advantages, for instance you dont have to pay second property SDLT on a commercial property and it can also be owned by a pension, so it is no surprise that commercial lets are rising in popularity.
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Why Should I Add Real Estate To My Portfolio
Real estate is a distinct asset class that many experts agree should be a part of a well-diversified portfolio. This is because real estate does not usually closely correlate with stocks, bonds, or commodities. Real estate investments can also produce income from rents or mortgage payments in addition to the potential for capital gains.
The 5 Types Of Commercial Real Estate
Before we get into the mechanics of how to invest in commercial real estate, its important to understand the various types of commercial properties. This way, you can start thinking about the commercial asset type in which you want to specialize. Commercial properties serve a broad range of purposes but are generally grouped into the following types:
Office
Special Purpose
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What Is The 5% Rule In Real Estate Investing
The 5% rule pertains to the three main costs you’ll incur if you own real estate investment properties. These costs include property taxes which should be no more than 1% of the property’s value maintenance costs should be around 1% of the property’s value, and the cost of capital should be approximately 3% of the property’s value.
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Tips For Building Wealth Through Commercial Properties
1. Due diligence & market research
Understanding the market is the key to success in commercial property.
Read what you can and get to know the market well.
Research everything from the big picture to small details such as walking around and ringing agents to check on rents in the area.
Investigate the health of the business sector you expect your tenant to come from and changes to infrastructure and local and state authorities plan for the region.
2. Invest in prime positions
Always invest in prime retail, commercial or industrial locations high-demand positions that are popular with tenants and purchasers.
Consider visibility, accessibility to public transport, and parking.
3. Purchase a leased property
When commencing investment in commercial property mitigate your risks by buying one that is already leased to a good tenant on a long lease.
4. Tenant calibre and lease term
As the value of your commercial investment will depend upon your rental return, a strong tenant on a long lease will underpin a great investment.
Check the rental per sq mt and ensure that the rate is not inflated compared to market rentals.
If the rental on your lease is $500 per sq mt and the market rental is $700 per sq mt then there is upside potential at our next rent review.
If the current rent is above market rental, you may be overpaying for the property and you will have little upside potential for rent reviews and therefore increased capital values.
5. Lease Structure
6. Recent Construction
Advantages And Disadvantages Of Real Estate Investment Groups
Real estate investment groups diversify their investments to maximize profits. Pooled resources allow for multiple investments, often generating larger returns.
When run by experienced professionals, the group’s investments can be diversified well enough to manage risk and reduce vitality. REIGs also benefit from having few limits on what activities they can engage in and how they operate.
Some real estate investment groups have formal agreements, stipulating when and how members can access their money. So, someone wanting to withdraw from the group may not be able to recoup their investment or share of the profits immediately.
Also, REIGs often have bylaws that cover the rules and regulations and set fees. These fees can be costly, especially when profits are slim or when losses occur. Some groups charge fees annually or more frequently. Lastly, the success of the group is largely dependent on the people who make the decisions. If governed by unskilled and inexperienced people, the risk may outweigh the reward.
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Diversified portfolio for maximum profits
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Buy The Amount Of Commercial Space That Reflects Market Demand
Buying too much commercial space is a common temptation for entrepreneurs. However, doing so can affect the future marketability of a property.
You can assume that the larger the building you buy, the smaller the pool of potential buyers who will be interested in the place when you sell, says Prikker. Most Canadian businesses are small enterprises, and theyre not looking for large spaces to meet their needs.
Generally speaking, if you buy property in the above-50,000-square-foot range, youre dealing with a limited pool of buyers. What Im seeing in the market is that those properties are just less in demand, because theyre not affordable for most entrepreneurs and harder to resell.
Create A Google My Business Page
Google My Business is a free service which helps local businesses promote themselves online. Searchers can instantly find results relevant to their location and what theyre looking for.
Creating a Google my Business listing for your property gives it additional visibility, ensuring your property appears on the first half of Google search as well as on Google Maps. Searchers can then see where your property is, and investigate the neighbourhood, before visiting you for more details.
A business profile also provides an opportunity to post photos, your latest offers, and respond to reviews. And you can use it to keep your business information up to date, so that searchers always know how to contact you.
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Who Does Commercial Property Investment Suit
If you have an eye for business and a strong business acumen and you can do some in-depth research on the area you are investing in, this strategy will suit you nicely.
An ability to understand the rules, regulations and tax implications of renting out a commercial property would be an asset, but if youre willing to learn these you can still make use of this strategy.
If you want to diversify your portfolio this may be a good strategy to start with.
Youll need to understand when its best to sell or to hold a property and youll need to keep an eye on business developments in the area to maximise capital growth.
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Fundamental #: Determine If Investor Assistance Or Asset Management Is Needed
Investor assistance is provided by an industry expert, as well as their property teams, to actively explore other real estate market opportunities.
- Some commercial investments will also offer Property Team asset management opportunities .
- You will gain the additional value of knowing that there are local experts on the ground, who will provide their direct input and apply their expertise to your commercial investment.
- Leverage the knowledge of an experienced investor when choosing a commercial real estate property.
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Why Is Real Estate Considered To Be An Inflation Hedge
Home prices tend to rise along with inflation. This is because homebuilders’ costs rise with inflation, which must be passed on to buyers of new homes. Existing homes, too, rise with inflation though. If you hold a fixed-rate mortgage, as inflation rises, your fixed monthly payments become effectively more affordable. Moreover, if you are a landlord, you can increase the rent to keep up with inflation.
Invest In Commercial Real Estate
Commercial real estate is different from investing in residential real estate, as its on a much larger scale. Commercial real estate includes multifamily properties, office, industrial, mixed-use, retail, hotels and land. It can be difficult to come up with the funds for investing in commercial real estate, but the rewards can be great. In addition to a range of a 3% to 10% cap rate, commercial leases are commonly in favor of the owner.
Commercial real estate commonly uses a triple net lease the tenant is responsible for base rent plus utilities, insurance, taxes and maintenance. The landlord or commercial investor assumes basically no costs and little risk with a common 5 to 10 year lease in contrast to a residential property where leases are generally 1 year with the landlord assuming a lot more responsibility.
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Attend Industry Events And Conferences
It goes without saying, commercial real estate events are a great opportunity to network, build relationships, generate leads and expand knowledge about the industry and market trends.
The possibility to build many relationships and in-person interactions in such a short period of time is difficult to achieve through other types of marketing channels. However, its critical to have a well-defined event marketing strategy because attendance and participation usually comes with a hefty cost.
The Role Of Inflation In Property Values
When considering appreciation, you have to factor in the economic impact of inflation. An annual inflation rate of 10% means that your dollar can only buy about 90% of the same goods the following year, and that includes property. If a piece of land was worth $100,000 in 1970 and it sat dormant and undeveloped for decades, it would still be worth many times more today. Because of runaway inflation throughout the 1970s and a steady pace since, it would likely take more than $700,000 to purchase that land in 2021, assuming $100,000 was fair market value at the time.
Thus, inflation alone can lead to appreciation in real estate, but it is a bit of a Pyrrhic victory. While you may get five times your money due to inflation when you sell, many other goods cost five times as much to buy too, so purchasing power in your current environment is still a factor.
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Consider The Tools And Software You Need
To execute an effective marketing strategy, you need to make sure you have the right commercial real estate marketing tools in place. The list of tools you use often referred to as a marketing stack covers a variety of different uses and requirements. Everything from contact management, to email marketing, to listing presentations, and more.
Its important to give the technology selection process the attention it deserves so you dont have to keep changing platforms. The switching cost from one commercial real estate marketing software to another can decrease productivity, and hinder your ability to operate at 100% as you manage the transition.
Companies that streamline, and optimize, the various marketing-related processes in their operations are more likely to experience sustained growth and overall success.
Understand How Commercial Real Estate Is Different
The first step as a commercial investor is understanding that commercial real estate is valued differently from residential properties. Unlike residential real estate, the income from commercial real estate is typically related to usable square footage. Also, commercial property leases typically last longer than residential leases. These two factors help illustrate why a commercial real estate investor has a better potential to earn a higher income.
Matt Woodley from Mover Focus advises start by doing your research. Make sure you understand the risks and rewards of commercial real estate investing. Also, be prepared to invest a significant amount of money upfront, and be willing to weather some tough market conditions.
Location is an important factor regardless of your investing niche, with commercial investing as no exception. However, commercial investors also need to pay close attention to their tenant type. The location and intended tenant type are two factors that intersect closely when determining demand. For example, a space intended for corporate offices will likely perform better in an urban center than a primarily residential neighborhood. Analyzing recent comparables can provide you with a better clue of how your property of interest might perform.
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Real Estate Goals Vs Strategies Vs Tactics
You could look at real estate investing and wealth building as climbing a mountain. And of course, you are the courageous mountain climber!
The peak of the mountain is like your financial and life goals. And there are numerous milestones along the way.
Rental Property Analysis
Strategies are like plans for how to climb up the mountain in the first place. They are the routes that will take you towards the peak in the fastest AND safest manner.
And tactics are like the climbing tools that help you actually climb up those routes.
I have many articles on real estate investing tactics, including analyzing your market, finding good deals, running the numbers, seller financing, negotiation techniques, and more.
But too many real estate investors get caught up in tactics without clarity on why they are using the tactics in the first place. Getting good at tactics without a strategy can simply make you better at hiking right off financial cliffs!
So I first recommend getting clear on basic real estate investing goals, like financial independence or a certain number of free and clear rental properties. Then get clear on one or two strategies that you like. After that, all of the tactics you learn will become much more useful.
Now lets take a look at the real estate investing strategies themselves.
Internal Rate Of Return
The IRR will show how your investment is performing. It calculates this figure by showing the value of money as it would compare to a different investment. In other words, the IRR helps determine if your money is properly growing with your current commercial investment property, or if there is another investment opportunity that would lead to a higher IRR.
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Real Estate Mutual Funds
Real estate mutual funds invest primarily in REITs and real estate operating companies. They provide the ability to gain diversified exposure to real estate with a relatively small amount of capital. Depending on their strategy and diversification goals, they provide investors with much broader asset selection than can be achieved through buying individual REITs.
Like REITs, these funds are pretty liquid. Another significant advantage to retail investors is the analytical and research information provided by the fund. This can include details on acquired assets and managements perspective on the viability and performance of specific real estate investments and as an asset class. More speculative investors can invest in a family of real estate mutual funds, tactically overweighting certain property types or regions to maximize return.
Commercial Real Estate Investing Trends In 2021 & 2022
Offices, hotels, retail stores, and other commercial real estate investments have suffered heavily during the COVID-19 pandemic. While the pandemic isnt over yet, commercial real estate is expected to continue a trend of economic recovery in the year ahead. Many commercial real estate investors are optimistic as the industry continues to adapt to changes.
While the start of 2021 did not promise a positive outlook, experts suggested commercial real estate would stabilize by the end of the year. According to Kathy Feucht, global real estate leader at Deloitte, commercial real estate investors planned to reduce costs by around 25% in 2021. However, there were many surprises over the last year, including increased demand for industrial properties.
With that in mind, there are several predicted trends for 2022 depending on the type of commercial real estate investment. Lets look at how these difference properties are expected to perform:
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