Home improvement shows have amplified the possibilities of making money in the residential real estate market. Find a distressed property in need of a little TLC, whip it into shape, and resell or rent it for a profit. While flipping houses and acquiring residential rental properties are solid ways to invest in real estate, they aren’t the only options.
Commercial real estate investments can be just as profitable, if not more so. These properties may involve a different type of tenant and distinct knowledge. However, investments like office buildings, shopping centers, and industrial spaces are opportunities to maximize your portfolio’s returns. Besides these conventional options, you might be surprised to learn multifamily dwellings and mobile home parks also qualify as commercial real estate.
Without a doubt, investing in commercial real estate can enrich your portfolio. However, it helps to know what to look for when balancing risks against rewards. Learn more about commercial real estate investments to take advantage of below.
Mobile Home Parks
Mobile home parks aren’t always seen as commercial properties for obvious reasons. People who live in those dwellings and mobile home parks aren’t exactly hotbeds for commercial activities like shopping. However, like multifamily homes, mobile home parks’ unique characteristics bring them under the commercial umbrella.
When you invest in a park, you’re typically staking a claim in the land itself. The tenants rent the lot space from you while maintaining ownership of their homes. The mobile homes are theirs to look after and maintain. You’re in charge of upkeep for the common areas, including utility hookups, onsite amenities, and roadways. Although this is the typical arrangement, you’ll also find mobile home park investments where you can own everything.
Yes, this means you, as the investor, also own the homes. With this arrangement, you become a full-fledged landlord responsible for leasing and maintaining everything in the park. Either way, you might not consider mobile home communities places where you can expect maximized returns. But with some forward thinking and planning, you could be amazed at how well these investments can perform.
Lifestyle Investing expert Justin Donald says, “I still invest in mobile home parks because they are a fantastic way to make money. One of the most significant benefits of investing in mobile home parks is that you can often get the sellers to finance it for you.” These arrangements might lead to more favorable terms for both sides and prevent deals from falling through. You’ll have an easier time adjusting operations to fit your profit schedule while meeting a seller’s exit needs.
Multifamily Residences
Another often overlooked commercial investment is multifamily properties. Due to the size of the buildings and the multiple units, multifamily dwellings are indeed commercial. From a lender’s and insurance carrier’s perspective, multifamily properties aren’t your run-of-the-mill home. Between the multiplied tenant (and profit) potential and additional risks from high-density living, it becomes easy to see why.
In a time when demand for office space creates a challenging environment, the appeal of multifamily properties is increasing. Higher home prices and mortgage interest rates are causing people to reconsider their housing options. A recent analysis by Bankrate reveals it’s cheaper to rent than own a home in the 50 largest U.S. cities. There’s a 36.6% difference between the average monthly rent and mortgage payment.
Contrary to what’s proved true in the past, renting can save someone that 36.6% difference each month. Of course, it’s all about location. Some metro areas have a smaller gap, such as 2%. Others have differences as wide as 50% in the average monthly costs of owning versus renting. For commercial real estate investors, the metros with the strongest potential include New York City, Washington D.C., Denver, and Chicago.
The demand for multifamily dwellings in these areas is stronger due to less affordable home-buying options. If you want to invest in multifamily properties, considering demand and market absorption rates is essential. Maximizing your returns means targeting investments with a steady income that exceeds initial and ongoing operating costs. It makes sense to invest in markets where rentals are going like hotcakes.
Commercial Real Estate Investment Trusts
Commercial real estate investment trusts or REITs are less hands-on for investors. Nonetheless, this can be a positive if you’re new to the sector. If you don’t have a ton of knowledge about how commercial properties work, you can still get your feet wet. With a commercial REIT, you let the experts select the properties and manage the day-to-day operations. Meanwhile, you reap the rewards of your investment’s growing market value.
You can choose to invest in public or private commercial REITs. Public REITs are traded on the open market and cater to multiple shareholders. Private REITs are usually owned and managed by one company. The company could consist of a handful of investors with various levels of involvement. For instance, the head of the company might be directly involved in finding, securing, and managing properties.
The remaining investors contribute their funds but mostly stay out of the business of managing the portfolio. Private commercial REITs require some networking since they’re not on the open market. This reality makes them more challenging to find. They may also require you to stay invested for longer.
Because these funds aren’t openly traded on the market, you can’t always sell your shares as readily. In addition, there’s less external oversight. On the other hand, private REITs offer more control over what properties make up the portfolio and how they’re managed. They are also known as captive REITs, governed by separate federal and individual state tax rules.
Maximizing Commercial Real Estate Investment Returns
Maximizing returns from commercial real estate investments still means following the basic rules of opportunity. You want to seek investments where the rewards outweigh the risks. As an investor, it pays to understand external factors like the location’s economy and demographics. Simultaneously, you must also evaluate the appeal of the property class and specific space.
With knowledge of the commercial real estate sector, mobile home parks and multifamily properties can be opportunities to maximize your returns. The demand for affordable housing will only increase, especially in markets where traditional home prices exceed average budgets. If you don’t have commercial real estate experience or want to remain hands-off, REITs can be the way to go. Just be sure the fund’s performance meets your expectations.
Published by: Holy Minoza
