Believe it or not, commercial real estate (CRE) has been defined by experts as “any real estate that is not residential.” Therefore, the follow-up question we should ask the experts is what is residential real estate? Here, experts provide a more specific answer.. Residential real estate is defined as properties with one to four single residences. So a single family residence, duplex, triplex, fourplex and condo units are considered residential real estate, and anything other than these are classified as commercial real estate.
Let’s go back to CRE! What types of commercial properties are out in the market? We have:
- Office
- Retail
- Flex
- Multifamily & Apartments
- Industrial
- Land
- Hospitality/Leisure
- Specialty use – Churches, government buildings, schools etc.
Each category has different sub-categories like office high-rise, mid-rise, garden style, and they can be classified as class A, B, C or D. These letter classifications are based on the condition of the property, quality and creditworthiness of the tenants, property income level, location and amenities.
Because of the wide range of property types, commercial advisors are specialized. Usually, industrial advisors are not familiar with office, retail or multifamily and vice versa. You may wonder why is specialization preferred when a broker can deal with all kinds of properties and make a greater commission? We do have a code of ethics in the CRE industry, and Article 11 of NAR Code of Ethics requires agents and brokers to practice in the areas of their competency. If they are not familiar with certain segments of an industry, they are mandated to work with someone who is knowledgeable in that specific segment.
Why would an investor purchase CRE properties?
First and foremost, investors invest in commercial real estate for the return on investment (ROI). REITs invest in CRE to make money for their investors and the investors give their money to REITs to invest for them, so they receive a healthy ROI. Other reasons to invest in CRE are:
- Resale value once they sell
- The desire for consistent income from rental revenue
- Desirable locations – Some people need to be in CBD or some prestigious address
- Tax benefits – deducting mortgage interest and taking depreciation
- Building an investment portfolio
Who are CRE investors?
Once you take a look at the types of individuals and entities who invest in CRE, you will be convinced that CRE is more than likely a reliable and effective investment vehicle. CRE investors typically include:
- Private investors
- Private equity groups
- Private investment companies
- Pension funds
- Credit Unions
- Life insurance companies
- Hedge funds
The CRE investors can invest locally, nationally or in different countries.
The benefits of investing in CRE?
- Steady and reliable steam of income
- Increasing stream of income
- Appreciation in value over time due to inflation and market growth
- Appreciation in value due to rent increases
- Mortgage interest is a business expense
- Mortgage payment builds up equity over time
- Building depreciation will reduce the tax liability
- Combining the equity growth and income (like stock and bonds)
- More control – You make the decisions not others
- Great retirement vehicle
Please contact me for further information or if you have any questions about commercial real estate.
