Commercial Real Estate Strategies
The term commercial real estate is an umbrella for six different types of property: land, office space, industrial space, retail space, multi-family apartments (four or more units), and mixed-use properties. Each type has its own unique subtypes, and related strategies for making money. It’s important to understand the differences between each type long before you tender an offer, because the type of commercial real estate directly informs the strategies you can use to make money.
In this article, we will explore, 1) strategies for making money with land, 2) strategies for making money with office space, 3) strategies for making money with industrial space, 4) strategies for making money with retail space, 5) strategies for making money with multi-family apartments, 6) strategies for making money with mixed-use properties, and 7) examples of successful commercial real estate strategies from real estate entrepreneurs.
STRATEGIES FOR MAKING MONEY WITH LAND
Land is generally categorized as greenfield – or undeveloped; infill – developed but vacant land; or brownfield land – land previously used for industrial purposes, and often environmentally damaged, but available for reuse.
Profitable land ownership requires you to find a suitable and lucrative use for the land – such as development, granting of easements, or sale of air rights. Otherwise, you will be stuck paying taxes on the property without deriving income. However, with greenfield land, there is no tenant-related risk, as with other types of commercial property. Returns for land investments can be as high as 20%.
Buying and holding
You can buy and hold land in an area you forecast will soon be rezoned, and/or see an influx of profitable neighboring developments/businesses. You will be saddled with property taxes and possibly local assessments, so you will need to ensure you have enough cash to absorb those expenses until your land becomes ideal for development and/or selling.
Land flipping is usually done in markets with rapidly rising property values. This can be very risky, especially if the market rapidly crashes. It’s important to have more than one exit strategy when flipping land. However, one can do this by buying land and selling it on a land contract or contract for sale, synonymous terms for a transaction in which you receive payments from the buyer and provide title when they have paid in full.
Rezoning and selling
You can wait until land is rezoned and sell it. This is usually done, when an area or parcel of residential real estate is rezoned for commercial usage, rather than vice versa. It is also often done when land zoned for rural use is rezoned for residential or commercial use. You can also attempt to get the land rezoned yourself, which can be a very complicated process, involving city planning commissions and considerable bureaucracy. You should consider the land’s proximity to cities and city services, roads, and environmental viability, when considering pursuing rezoning.
Developing land is perhaps the most lucrative and most difficult way to make money with land. After buying the land you will entitle it (gain approval for specific development), plan the construction project, screen and select a construction firm, obtain the required building permits, begin construction, and complete the required inspections to ensure that the building is in compliance with state and local building standards. You will want to do proper due diligence to ensure that you eliminate environmental, title-related, and other non-construction-related risks before you break ground. Once you are nearing completion of the construction, you will begin to market it, for either buyers or tenants.
There are considerable risks with this approach, particularly during the construction phase, such as falling demand for the type of property you are building, your land being rezoned and other changing regulations, and poor construction work, among others. If you have not sold or rented the property by the time you have completed construction, you will bear the full brunt of property taxes and any special local assessments, without mitigating sales or rental income.
Tips For Buying a Property or Rural Land
STRATEGIES FOR MAKING MONEY WITH OFFICE PROPERTIES
The most common way to make money with office properties is to own and rent them. Office space is commonly divided into three categories: Class A – high-quality construction and location; Class B – high-quality construction, not-so-great location; and Class C – less than high-quality construction, and less than desirable location. Further categories are Central Business District, or Suburban, which relate to office building location. Ideal investments are Class A in a Central Business District, but these are also usually the most expensive. You can find opportunities in all categories.
Office properties, like other forms of commercial real estate, confer the advantage of business tenants. Bad tenancy can harm a tenant’s business in some cases as much as you, so carefully screened clients can provide stable income. Tenant related risk comes from tenants moving, or going out of business. Other forms of office-related risk, include rezoning, vacancy, obsolescence, and risks associated with having multiple people on the property. However, the return can be as high as 7% to 10% of one’s investment.
Own and operate
You can make money through the rental income derived from office properties. If you own an office building, you can also make money through common access maintenance (or CAM fees). These refer to the fees you charge tenants for maintaining areas to which they all have access. An office building may also feature amenities that can be opened to the public. For example, a commercial office building, with retail storefronts on the ground floor, may open these up to the public. You also will want to require tenants to sign long-term leases (three years or more) to ensure stable, predictable income. These leases should include clauses for annual rent increases.
Buy and hold
You can buy and hold individual office space or office buildings you own for long-term appreciation. You can increase the chances of this by buying office property that is centrally located, and by making improvements that enhance energy efficiency, increase parking availability, and improve lighting, structural elements, and security. Make sure that you avoid making long-term alterations to the property that reduce your chances of finding new tenants, without stipulations in the lease that require the tenant to pay for removal costs.
How to Buy Commercial Property Tips
STRATEGIES FOR MAKING MONEY WITH INDUSTRIAL PROPERTIES
Industrial properties can be classified as heavy manufacturing, light assembly, flex warehouse, or bulk warehouse. Heavy manufacturing is usually customized with specific machinery for the tenant, while light assembly can be rearranged easily. Flex warehouse usually contains both office and industrial space, and bulk warehouse, usually the largest of the four, are generally used for product distribution across a regional area, and including loading areas for trucks.
Vacancy is a huge risk, especially with large and customized properties. Manufacturing or distribution related-accidents can require expensive repairs. And environmental damage caused by tenants can also be disastrous, requiring expensive remediation, and in some cases, prompting rezoning. However, industrial real estate lease terms are usually three to five years, and can last as long as ten years per lease period. You are likely to see stable returns of 7% to 15% if you manage your properties properly.
Own and operate
The good thing about industrial real estate management is that it is largely hands-off once you have (a) solid tenant(s). Industrial tenants come in ready to work, with a stake in ensuring that everything is, and remains in, working order. The urban industrial real estate market in the U.S. is shrinking as more areas become zoned for residential development, and more cities are developed. Investors should look for properties with feasible transportation infrastructure, such as clear roads or railroads that connect them with cities. You should also assess the height of the warehouse (which determines capacity and universe of prospective tenants), the state and type of loading dock, any additional land that comes with the property, and office space, in addition to location. Similar to office properties, you should require long-term leases with annual rent increase clauses.
Buy and hold
Buying and holding industrial property provides you with the highest return over the long-term. You should look to make improvements that facilitate transportation, such as loading docks, as well as those which make it easy to reconfigure your space for multiple types of manufacturers and distributors. You can also assess whether it makes sense to hire loading personnel whose services your tenants can hire for additional fees.
4 Steps to Selling Industrial Property with Dan Doherty
STRATEGIES FOR MAKING MONEY WITH RETAIL PROPERTIES
Retail properties include Strip Centers – small retail properties with or without an anchor tenant; Community Retail Centers – which range from 150,000 to 350,000 square feet, and usually have multiple anchor tenants; and Power Centers – which range from 30,000 to 200,000 square feet and often have a big box retailor as an anchor tenant. There are also Regional Malls – which range from 400,000 to 2,000,000 square feet, and have multiple big box retailers as anchor tenants, and Out parcels, which are pieces of land attached to a large retail center, used by restaurants or banks.
Retail properties require considerable capital and time to obtain. One of the biggest risks is the inability to find tenants and/or existing tenants suffering a decline in profitability. It can take significant time to fill retail vacancies, especially in declining regional real estate markets. Further, online storefronts are eating into brick-and-mortar profits across the globe. But retail yields can range from 7% to 11%, which, given the significant capital expenditure required, can be a sizable profit in absolute dollars.
Own and operate
When buying, look for spaces that are centrally located and where there is existing foot traffic. Your ideal retail property should also have plenty of available parking, and should be visible to pedestrians and passing cars, as you must be able to market the space. Location can make or break your investment. Screen your tenants carefully, paying attention to their profit and loss statements, income statements, and business plans.
Buy and hold
You have to be careful when making renovations that you are not reducing the chance of finding tenants. For example, installing a kitchen means that you will no longer receive offers from retail apparel firms. Take a look at existing anchor tenants to see what does not exist in your area. Make your renovations with this in mind, but avoid those that cannot be easily reversed.
STRATEGIES FOR MAKING MONEY WITH MULTI-FAMILY APARTMENTS
Multi-family apartments include garden apartments, which are typically three to four stories, and contain approximately 50 to 400 units; Mid-rise apartments, usually 5 to 9 stories and between 30 and 110 units; and High-rise apartments, which are usually 10+ stories and contain at least 110 units.
The number of multi-family units can minimize vacancy-related losses. But multiple residential tenants bring their own problems, including late payments, and damage to the property by tenants, their kids, their pets, and the like. Further, consumer protections allow you less leeway in structuring lease terms and in landlord tenant disputes than with other forms of commercial property. But multi-family apartments can be tremendously lucrative, especially in an era during which more people are renting rather than buying homes. Typical returns are 10% percent of one’s investment. Further, considerable financing is available to real estate investors with the right qualifications – in some cases up to 90% of the purchase price. And this, combined with income streams from multiple tenants mitigates risk significantly.
Own and operate
One strategy to make money with apartments is buying an apartment that has been managed badly. Improvements, such as property renovations or employing a better property manager, can be implemented and rents raised accordingly. When operating an apartment with more than ten units, unless you hold no other employment, it is strongly recommended that you employ the services of a property manager or property management firm. Make sure you have comprehensive insurance policies in place to protect your property and limit your liability.
Buy and hold
If you have invested in a multi-family apartment for long-term appreciation, in addition to rental income, you will want to ensure that you make renovations to the unit kitchens, wiring, and bathrooms, as well as the building lighting, structural elements, roofing, and security. These play a significant factor in residential real estate appraisals. Condo conversions and rezoning can also have a positive impact on your property’s value.
Real Estate Investing In Multi-Family Apartments Dave Lindahl
STRATEGIES FOR MAKING MONEY WITH SPECIAL PURPOSE/MIXED-USE PROPERTIES
There are many different types of special purpose/mixed-use properties, including but not limited to affordable housing, museums, amusement parks, storage facilities, churches, bowling alleys, theaters, concert halls, nursing homes, and community centers; and the strategies for making money with each vary by type.
The risk here is generally a combination of tenant risk and risks related to the specific use of the property. For example, most car washes use chemicals extensively, leading to the risk of environmental damage. Storage facilities, by contrast, might yield a security risk if they are located in a high crime area. Zoning is also a consideration, especially if you are considering getting an existing property rezoned. The return varies with the type of property, especially considering that many types of mixed-unit properties involve government, not only through rezoning, but through subsidies.
Making money with special purpose/mixed-use properties largely depends on the type of property that you purchase. However, when operating these properties, follow best practices for real estate investments: screen tenants thoroughly, maintain regular communication with them, make sure that you perform regular maintenance, and implement strategic renovations designed to increase the property’s underlying value. Forecasting the market for the business of prospective tenants is also critical.
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EXAMPLES OF SUCCESSFUL COMMERCIAL STRATEGIES FROM REAL ESTATE ENTREPRENEURS
Many billionaires have either made their fortune, or have a significant portion of their portfolio, in commercial real estate. More than 30% of the billionaires on the Fortune 400 list count real estate as a significant portion of their portfolio. Many of these billionaires, such as Wang Jianlin of China, are from Asian-Pacific countries, and have made their wealth by developing retail properties. Jianlin built his fortune over the past two decades through his acquisition of movie theaters, and development of retail locations, and office buildings. In the U.S., Donald Bren began building his fortune after World War II, by building residential, retail, and office properties on undeveloped land in Southern California, which have grown in value to be worth $12 billion today.
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