How to get into Commercial Real Estate (CRE)

Are you ready to transition from residential to commercial real estate?

What is commercial real estate?

Commercial real estate is intended for business purposes and is composed of offices, retail, industrial, multifamily and hospitality.

Like residential properties, location matters and you make money from monthly rents, appreciation and tax savings

Benefits of investing in commercial real estate

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  1. Higher Profits as rental rate by sq/ft are higher
  2. Tenant diversification as a single property may accommodate several tenants
  3. Stability as leases are generally long-term
  4. Valuation is based on the net operating income generated by the property
  5. Passive investments as it is possible to invest as a limited partner or through an absolute lease agreement where all the maintenance is managed and paid for bu the tenant
  6. Asset diversification possible through investing in different types of commercial building or markets

Differences with residential real estate

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  1. Higher barriers of entry as properties are more expensive (more capital needed) and there are more competitors (REITs, seasoned investors, crowd funds and business operators)
  2. Smaller property pool as there are less businesses than homes
  3. Longer leases but possibility to ask for any document to vet tenants
  4. Lower vacancy rates and longer notice periods to find a new tenant
  5. Lower turnover costs
  6. Higher profitability potential due to more rentable space, more tenants, more rental income giving the possibility to hire a part or full-time on-site property manager so you do not need to run the day-to-day and can find other deals
  7. Deal clauses can force the tenant to pay directly for most or all operating costs

Downsides of Commercial Real Estate

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  1. More volatile and exposed to business cycles. In downturn, a lot of small businesses fail or have difficulties so it hard to push rent upwards or to offer long-term leases
  2. The loan application process is more cumbersome and focus more on the property, the income produced, and the principals involved
  3. Experience and education is crucial as the investor must know how to structure a transaction, tax and legal implications, zoning ordinances, financial statement analysis, inspections, titling…

Tips to transition to Commercial Real Estate

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  1. Gain as much knowledge as you can before investing (books, podcast, videos)
  2. Build relationships in the industry with bankers, brokers, investors to get more insights and deal opportunities
  3. Find a mentor, someone who has been there and done that
  4. Find partners with whom you can gain knowledge and experience by investing in their deals

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