This article is part of our passive investors guide on real estate syndications, available here.
Real estate is a fantastic long-term investment strategy, and commercial real estate is one of the most time-tested asset classes to help build long-term wealth.
So, what are CRE investments, and how do you use them as a wealth vehicle? Here, we will discuss everything you need to know about commercial real estate investing, including what it is, how investors can use it to build long-term wealth, and the different CRE Investments.
What Are CRE Investments?
Commercial real estate, or CRE, refers to assets like offices, shopping centers, and factories primarily utilized for commercial purposes and to generate income for their owners.
CRE is a desirable investment class due to its steady profits, passive income, tax advantages, and growth prospects. As an investment option, this area of real estate investing is increasing in popularity each day. p
About one-third of the real estate market in the United States is a commercial real estate asset.
The property may hold residential residents rather than businesses in some circumstances, such as the case of large apartment complexes. Let’s look at how commercial real estate investors can build long-term wealth through investments in commercial properties.
How CRE Investors Build Long-Term Wealth
Commercial real estate investing has the potential to be profitable and act as a buffer against stock market volatility. Most returns for investors come from tenancy rents. However, they can profit from property appreciation when they sell the asset. In short, commercial properties help real estate investors build long-term wealth by:
- Providing a hedge against inflation: A hedge is, by definition, a sort of investment strategy that aids in shielding owners and investors from the declining purchasing power of money when inflation takes hold. Our analysis of historical inflationary tendencies and the expertise of our team demonstrate that investments in commercial properties can serve as a hedge during periods of above-average inflation.
- Through strong property appreciation: Property incomes increase annually, and investors are willing to pay more for that yield, creating large property appreciation across the hold period of a CRE deal.
- Tax advantages: CRE investments provide exceptional tax advantages that allow investors to shield their income from a CRE deal through large depreciation or “paper losses” that are available as owners.
- Providing cash flow: Finally, commercial real estate can generate strong, consistent cash flow.
Now that you know how commercial real estate investing can help you build long-term wealth, it’s time to discuss the different investments you can make in the commercial real estate market.
The Different Types of CRE Investments
Any investment property bought to generate revenue for the property owner through tenancy is called commercial real estate, or CRE.
Commercial real estate (CRE) is generally used for business-related activities, as opposed to being utilized as a residence, which would typically be classified as residential real estate.
Most frequently, renters lease commercial real estate to conduct businesses that generate cash. This vast real estate category can range from a small shopping mall to a single storefront. However, commercial real estate can be categorized into two broad categories for investment purposes. These include multifamily, office, retail, and industrial. The following is a brief explanation of each type.
A multifamily structure must include five or more units to be categorized as a commercial property. An individual tenant or family resides in each unit. The property’s upkeep, leasing, and general property management fall under the purview of the operator of the deal.
Investors in multifamily real estate frequently begin with a limited number of properties before trading up to more significant, more profitable investments using tax benefits like a 1031 Exchange.
The most robust risk-adjusted returns of any CRE investment type can be found in multifamily properties because experienced investors can use their network, infrastructure, and know-how to boost cash flow and value.
To provide locations for workers to work and collaborate, businesses buy or rent office space. Because companies don’t relocate their offices frequently, office buildings typically give investors a steady return. The following classes broadly categorize office buildings:
- Class A buildings have the best appearance, age, infrastructural standard, and location.
- Class B structures are typically more aged and less price competitive than class A structures. Investors frequently choose to restore these structures.
- The oldest buildings are Class C buildings, which are often older than 20 years, located in less desirable regions, and require care.
Businesses that offer goods and services to people, such as shops and eateries, fall under this category. Restaurant spaces, shopping malls, single-unit shops, and strip malls are all examples of retail property. An investor buys the retail space, and the business owner leases it from them.
All real estate utilized for manufacturing or extensive commercial storage, like a warehouse or production facility, is considered industrial property. Such properties must adhere to stringent zoning laws and are frequently found outside residential, commercial, and business districts. Usually, a single renter or business owner occupies them.
Due to their simple layout, these properties are typically less expensive to buy and maintain. Investors are swarming to the industrial market as there continues to be strong growth in e-commerce and increased demand for logistics. The only drawback is that leasing for industrial CRE might be more complicated since it appeals to a specific tenant type.
We have covered all bases regarding commercial real estate investment. However, a few frequently asked questions (FAQs) regarding CRE investing need to be answered: that is what we will be doing next.
Frequently Asked Questions about CRE Investing
It’s always a good time to make a commercial real estate investment if you buy it right and manage it right.
A CRE company offers commercial real estate development, financing, management, upkeep, sales, and leasing competence.
The terminology “sponsor” in commercial real estate refers to the person or business that successfully steers the project from inception through completion. They manage all the day-to-day operations and project execution from a to z.
CRE Real Estate Investing - Conclusion
There is no one commercial property type that is ideal for all investors. Every kind of property has its advantages and disadvantages. The perfect CRE investment may differ based on the region, market trends, and a specific investor’s expertise, skills, and resources.
But, if you are particularly interested in investing in one of the strongest asset classes in multifamily real estate, join the Investors Club here at Willowdale Equity. You’ll get access to private value-add multifamily real estate investment offerings across the southeastern United States.
- Investopedia, “Commercial Real Estate Definition and Types”
Interested In Learning More About PASSIVE Real Estate Investing In Multifamily Properties?
In this video crash course, you’ll learn everything you need to know from A to Z
about passive investing in multifamily real estate.
We’ll cover topics like earned income vs passive income, the tax advantages, why multifamily, inflation, how syndications work, and much much more!