Top Commercial Real Estate Investment Strategies

Commercial real estate investing is a great way to build long-term wealth, diversify your portfolio, and generate passive income. Like any investment, understanding and executing the right strategies is the key to success.

This page covers the most common strategies used for commercial real estate investments in the US. If you are a novice investor, you will be able to get started based on the information below. Ready to explore the exciting world of commercial real estate investing?

What Is Commercial Real Estate?

Commercial real estate refers to any property that is used for business purposes rather than for residential living. Properties can include office buildings, retail stores, warehouses, industrial facilities, hotels, and hospitals. Income from commercial real estate investing typically comes from renting the space to businesses. Investors also can make money from capital appreciation when they sell the properties.

Why Invest in Commercial Real Estate?

Investing in commercial real estate offers numerous advantages. This includes portfolio diversification, generating a steady income stream, and the possibility of sizable profits on real estate developments.

Commercial real estate investing also comes with significant risks. For example, if a property sits vacant for too long due to economic downturns or regulatory changes, there is no income to offset the ongoing expenses. The value of the building could decrease drastically. Fortunately, there are plenty of investment strategies that offer more safety, so the risk-averse investor can still participate in this sector.

Core Strategy

The core strategy focuses on high-quality, stable commercial properties in prime locations that already have long-term leases in place. These properties are low-risk and provide a steady income. They can include newer office buildings in active business districts, retail plazas with an anchor grocery store, medical centers, and industrial parks.

Core commercial real estate investing strategies give you stable income from reliable long-term tenants. On the downside, returns are on the modest side, which reflects the low risk investors are taking on.

Value-Add Strategy

The value-add strategy involves buying commercial real estate investments that have potential but need improvement. These improvements can be renovations or changes to the way the property is run. For example, attracting new tenants or raising rents would add value to the property. It would also increase its income potential. Once the value has been added, investors might sell the property or hold on to it for the higher income it now yields.

Value-add commercial real estate investment strategies are best for investors who are hands-on, especially people who have renovation or property management experience. These strategies offer potential for higher returns than core strategies, but they also involve more risk.

Opportunistic Strategy

At the riskiest end of the commercial real estate investing spectrum are opportunistic strategies. This involves acquiring properties that need major upgrades or repurposing. These properties might include vacant buildings, raw land, or distressed assets in up-and-coming neighborhoods.

Some examples of the opportunistic strategy include converting an unused warehouse into office space, purchasing an abandoned shopping mall and turning it into mixed-use development, or buying raw land to be leased out for farming.

This type of commercial real estate investing is best suited for experienced investors who are risk tolerant and have the capital to ride out the development period and absorb up-front expenses. They can yield substantial returns on investment and present interesting and exciting investment opportunities.

Triple Net Lease (NNN) Investment

In an NNN lease, the tenant pays for taxes, insurance, and maintenance in addition to rent. The leaves the investor (the landlord) with minimal responsibilities. Triple net lease properties (NNN) have the benefit of predictable, passive income over the long term.

The key to successful investing with these types of commercial real estate strategies is to look for properties that have existing, reliable tenants. Returns tend to be lower but steady.

Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) allow you to participate in commercial real estate investing without owning properties yourself. REITs are companies that own and operate income-producing commercial properties. They operate in a variety of real estate sectors, allowing investors to choose the type of real estate they want to invest in. They do not however, choose the specific properties. REITs are traded on public exchanges similar to stocks and bonds, making them easy to buy and sell.

These commercial real estate investments offer diversity across property types and regions. You can start investing in them for as low as $10. This makes them perfect for novice investors and people who do not want to deal with the complexity of direct property ownership.

Buy and Hold

The classic buy-and-hold strategy is ideal for investors who want long-term growth and enough capital to park in an investment for a period of years or even decades. Using this commercial real estate investment strategy, you benefit from compound growth through rental income and capital appreciation. There are also attractive tax deductions that can help you offset the income from the property.

For the buy-and-hold strategy to be successful, the property must be in a stable market that has historically experienced steady growth. Working with an experienced real estate agent can help you identify these areas.

Commercial Real Estate Crowdfunding

Real estate crowdfunding has made commercial real estate investments accessible to everyday investors. Crowdfunding platforms such as Fundrise, RealtyMogul, and CrowdStreet have become enormously popular in recent years. These platforms pool funds from multiple investors to finance large commercial projects.

Crowdfunded projects are professionally managed and have low minimum investments, making them perfect for novice and experienced investors alike. Their main downside is that they are not as liquid as some other types of commercial real estate investments, so your funds could be tied up for several years.

Whether you are investing in REITs, buying a retail plaza, or joining a crowdfunding project, commercial real estate investment strategies offer a wide range of opportunities for building wealth and getting involved in the exciting world of real estate investment!