What is commercial real estate and how to make a profit from it? 2021

What is commercial real estate and how to make a profit from it?

13.04.2021 10:00

Many successful entrepreneurs and businessmen talk and write books about the benefits of investing in commercial real estate. In this article, we will try to understand what objects are considered to be commercial and how to choose them correctly in order to ensure a high income in the future.

Real estate can be divided into two categories: residential and commercial. We all know what is residential real estate. However, do you know which real estate belongs to the second category?

According to the definition taken from wikipedia.org, commercial real estate is buildings, structures, or land used for commercial activities which provide permanent profit or capital gains, rental income, or investment income.

Such objects can be divided into 6 categories:

  • general purpose (hotels, bars, fitness centres);
  • retail trade objects (shops, shopping and entertainment centres);
  • office buildings;
  • industrial (industrial enterprises, workshops, warehouses;
  • social (medical centres, stadiums, airports) ;
  • apartments.

As a rule, commercial real estate is purchased for the purpose of generating income. There are 3 options for such an investment:

  • rent;
  • resale;
  • premises for your own business.

Let’s elaborate on the first two points.

Purchase of commercial real estate for the purpose of renting it out

According to experienced investors, premises for a cafe or a beauty salon are a more profitable purchase than apartments — the payback period for investments is shorter, and rental rates are higher.

Another advantage mentioned by investors is that all transactions with commercial real estate, as opposed to residential, are usually official. Professional lawyers and realtors work on contracts, so that an investor can be sure of the legality of the whole process.

When buying a property for the purpose of generating passive income by renting it out, the investor should pay attention to the following factors:

  • location of the object;
  • layout;
  • district infrastructure;
  • the state of the object.

It often happens that if you fail to consider one of the above-mentioned factors, it may make a business illiquid. According to experts, two identical premises in the same building can generate different income due to the fact that one of the objects, for example, is located closer to the parking lot.

As a rule, the repair of the object is done by tenants. However, the owner should still take into consideration the original condition of the property and its purpose. For example, in buildings of cultural heritage, it will not be possible to make a powerful ventilation system, which is necessary for a restaurant or cafe.

Before you buy a property for rent, you should carefully study all the documents that specify the requirements and restrictions.

Purchase of an object for its subsequent resale

Many investors prefer to invest in residential complexes and business centres. At the pit stage, prices are always much lower than after commissioning.

As a rule, such investments are quick, and the object becomes profitable for resale after 2-3 years. During this time, the liquidity of the building and the demand for it increase and, as a result, the price of it increases as well.

To make the investment profitable, an investor should pay attention to the location of the object, traffic, infrastructure, demand for housing, the cost per square meter, as well as conduct an analysis of competitors.

When investing in such developments, an investor should take into account that they require large capital. Residential complexes and business centres that claim high liquidity require large investments.

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