9 Reasons Small Businesses Should Invest in Commercial Real Estate

Types of commercial real estate investments

For small business owners who want to start investing in commercial real estate (CRE), the first step is deciding which type of real estate investments will work best for their long-term commercial real estate financing goals and current cash flow position. There are two basic types of real estate investments: debt and equity.

Types of commercial real estate investments

Debt investments

A debt investment is when a business uses its profits for commercial real estate investing. Typically, profits are used as a down payment for the commercial property loan. The commercial loan amount is secured by a real estate asset like land or a building.

Equity investments

Equity investing is when investors have partial ownership in commercial real estate, like an office building. With this type of investment, businesses get regular rental income. This type of investing is common in partnerships.

9 Reasons to invest in commercial real estate

Small business owners start exploring commercial real estate investing in real estate for many reasons. Maybe it’s to follow a passion, generate income, or create a family legacy.

If your business generates enough profit, commercial real estate investing can be a great way to grow that income. In general, real estate goes up in value over time—it’s a limited resource!

Whether an additional source of business income or a primary revenue stream, investing in commercial real estate can be a smart choice.

1. Commercial real estate can provide a steady cash flow.

Commercial real estate investing can provide steady income streams through rental income. This increases working capital, allowing for more investment in commercial real estate!

2. Commercial tenants have a vested interest.

Commercial property owners and tenants have a common interest in maintaining the property. Tenants want to attract customers, so they need to keep up the appearance of the office buildings. Meanwhile, property owners want to protect their investment. Working together can help maintain and even increase the property value.

3. Commercial real estate investors can increase real estate value.

Several things impact real estate values. These include:

• The Federal Funds rate
• The real estate market
• Inflation
• The economy.

As a real estate investor, you can increase the value of property by making improvements to it, then make your money back by either raising the rent or selling it at a higher price. Or sometimes just sitting on property long enough can make you money through appreciation.

4. Commercial real estate investing has tax benefits.

Believe it or not, you can get tax benefits from depreciation. As a building depreciates, you can claim a loss on income taxes. This reduces your taxable income.

There are other tax benefits that come from commercial real estate investing. For example, you can deduct the interest that you’ve paid on your mortgage. And of course you can deduct expenses. Check with a CPA to understand more fully how taxes impact real estate ownership.

5. Commercial real estate investing can have higher returns than other investments.

Commercial real estate can offer small business investors higher returns than other investments.

Commercial real estate investment returns are measured in Cap Rates, which measure risk and potential rate of return. Low cap rates show a higher-value asset with low risk. High cap rates show a low price with great potential upside.

6. Investing in commercial real estate can be lower risk.

Commercial real estate investments less risky than the stock market or other volatile markets. Commercial properties often have multiple tenants with long-term leases. These long lease terms practically guarantee steady income for landlords.

7. Commercial real estate offers escalating revenue.

Long-term commercial real estate leases allow landlords to raise rent at regular intervals. In fact, rent increases are usually built in to the lease. This means property owners can expect their profits to increase over time, as long as maintenance costs don’t get out of hand.

8. With commercial real estate properties, there is less competition

The commercial real estate market often has fewer people vying for properties. It is still competitive, but you’ll be dealing with fewer people, so you may be able to build your network faster. Of course, you can always hire a commercial real estate broker to help you find investment properties.

9. Commercial real estate investing can diversify your investment portfolio.

Commercial real estate is a great way to diversify your investments. If you traditionally invest in stocks, owning real estate can help you get stable income when the market goes down. It can also provide passive income, especially if you hire a property management company.

How to invest in real estate as a small business owner

Now that you know some of the benefits of commercial real estate investing, you might wonder how to start.

Here’s a short guide to help you out.

Choose a niche

Before browsing real estate listings, choose a profitable niche.

Here are some common property types:

• Multifamily residential – Multifamily real estate includes apartment buildings, residential properties, and student housing. Multifamily real estate typically requires more involvement from the owner/investor. This is due to shorter lease terms and more maintenance needs.
• Office space – Office buildings include small suburban units, city skyscrapers, and everything in between. Office buildings provide property owners with steady cash flow. They also have lower levels of maintenance.
• Hospitality – Hospitality real estate includes motels, vacation homes, and hotels. The hospitality niche experiences a lot of turnover, so investors should expect fluctuating revenues.
• Retail – Strip malls and small storefront units provide investors a dependable passive income source. Maintenance is less demanding than for multifamily residential investments. Most retail building investors use a property management company to handle maintenance.
• Industrial Properties – Warehouses and distribution centers can be a profitable niche. This is because industrial units offer long lease terms, established tenants, and less hands-on maintenance.

Choose a strategy

Once you’ve decided on a niche, it’s time to choose an investment strategy. Here are some investment strategies to consider:

• Land Banking – Buying land for future development.
• Development – Buying land to hold, build on it, then sell for profit.
• Value-add – Sometimes called flipping or fix-and-flip, value-add is buying a property to increase its value through repairs or renovations.
• Owner-occupied – Buying property where you’ll run your business.
• Passive income – Passive income is buying real estate to collect rental income.
• Wholesaling – This is buying properties below market price and selling them for a profit to investors.

Understand the financial aspect

Before investing, it’s important to understand commercial real estate transactions and underwriting. Underwriting is where the lender evaluates your financial health and decides how much risk they are willing to take to lend to you.

Commercial real estate underwriters will generally consider local market trends and conditions, purchasing and selling cap rates, capital needed, and other factors.

Enlist experts

Building an investment team may make sense, depending on your industry experience. Consulting with professionals can help you make informed investment decisions. These professionals are also experts in the due diligence process and can make it easier.

• Commercial real estate attorney
• Commercial real estate broker
• General contractor
• Commercial property management company
• Business lenders

Small business loans for commercial real estate investors

Several business financing options can be used for commercial real estate investing.

Small business loans can be used to:

• Purchase land or buildings
• Renovate existing commercial properties
• Cover construction and development costs
• Make repairs
• Cover the costs of tenant improvements
• Offset fluctuating cash flows or losses in revenue

You can get commercial real estate financing from traditional lenders, like banks and credit unions, the Small Business Administration, and online lenders, like Biz2Credit.

Commercial real estate loans (CRE)

Commercial real estate loans are the most common type of small business financing. Several loans are available, including traditional bank loans, SBA loans, and specialty financing.

• SBA Loans – SBA loans are lower-interest commercial loans that can be used for land, buildings, and renovations. SBA loans are partially guaranteed by the Small Business Administration. There are two different types of SBA loans for real estate: the SBA 7(a) loan and the SBA 504 loan. The 7(a) program approves borrowers for up to $5 million. But, the loan has strict eligibility requirements. Borrowers must have a good credit score and show they intend to occupy the property. SBA 504 or CDC (Certified Development Company) loans can also be used to purchase owner-occupied real estate.

• Traditional commercial mortgages –Traditional commercial mortgages are another type of commercial real estate loan. Interest rates on traditional commercial mortgages generally run between 5% and 7%. Closing costs range from 2% to 5%. Meanwhile, repayment terms are based on your creditworthiness and how much you borrow. In the end, you could have from five to 20 years to pay off the loan, usually in equal monthly installments over the life of the loan.
• Specialty loans – Special loans are an option for commercial investors with unique funding needs. These loans can fund the purchase or renovation of commercial real estate. Meanwhile, bridge loans are short-term financing. They close a gap between the capital a business needs right now and what it will need in the future. Hard money loans are similar to bridge loans but have higher interest rates and down payments.

Working capital loans

Working capital loans for small businesses provide quick funding for operations. This can include an unforeseen expense or a large purchase that you need to keep the business running. The main benefit is that funds from working capital loans are usually distributed quickly.

Working capital loans include:

• Short-term loans – A short-term business loan is a traditional type of financing. With a short-term loan, the borrower receives a lump sum payment upfront. Then, they repay the loan with regular monthly payments. Unsecured loans without collateral are available for borrowers with excellent credit.
• Working capital lines of credit – A business line of credit is a cross between a loan and a business credit card. Essentially, you qualify for a set amount and can draw on that amount like a credit card, but you only pay interest on what you use.

Frequently Asked Questions (FAQs)

1. Is commercial real estate a good investment?

   It can be! You can use commercial real estate as a hedge against inflation. Even when inflation goes up, so do rental prices and property values. Of course, you have to make smart investments.

2. What is a Cap Rate?

   The Capitalization Rate (Cap Rate) measures a property’s profitability. You calculate it by dividing the net income for the year by the property’s value.

3. What is a good ROI for a commercial real estate investment?

   Experts say that a 7% to 12% return on investment is good. But it depends on what your goals are. That’s why it’s good to partner with an industry expert or commercial real estate financial provider when evaluating ROI.

4. What are the most profitable commercial real estate investments?

   Buildings with more tenants are usually more profitable. This includes multifamily properties, apartment complexes, self-storage facilities, and student housing. Office buildings and hotels can also make a lot of money. But it’s always going to come down to how much you pay for the property. Because if you pay too much, even a lot of renters won’t be able to make

Bottom line

Commercial real estate investments can be a good way to generate passive income. CRE can also increase your bottom line across all your business operations.

Commercial real estate is low-risk and offers tax benefits, high returns on investment, and consistent revenues.

Consider speaking with a real estate broker or small business lender, like Biz2Credit, to get your commercial real estate investment portfolio started.

Biz2Credit helped TJ Shah, owner of Georgia-based Shah Realty, fund his dream of owning rental properties.

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