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Diversifying your Investment Portfolio with Commercial Real Estate

Aubrey Linville Photograph

Posted By Aubrey Linville

 For the individual willing to take on a little work and research, commercial real estate  investments offer a wide range of possibilities, from small multi-family apartment buildings to strip shopping centers to self-storage warehouses. There is a tremendous range of commercial properties available for any investor to consider. Each type of property presents its own potential for returns, management responsibilities, and, of course, level of risk. A property that is well managed and properly financed can yield significant returns over the long term.

Here are some suggestions for making a first-time venture into investment real estate:

  • Establish a realistic objective. Just as with stocks and bonds, an investor planning to purchase a commercial property should set objectives that are defined and attainable. Since returns on leased commercial properties aren’t subject to the short-term roller coaster ups and downs of Wall Street, investors should not expect dramatic short-term returns. Smart investors determine an exit strategy for disposition of the property at a prescribed time, preferably when the property has appreciated in value and market demand is strong. Identify what type of factors may trigger the sale (retirement, the purchase of a new home, relocation, etc.), and keep in mind that real estate is not always a liquid asset.
  • Add sweat equity.Add to the bottom line by investing personal time in the upkeep and management of the property. General remodeling tasks, minor interior and exterior maintenance, general accounting, and other related chores often can be completed by the investor. This “sweat equity” helps reduce overhead costs while letting the investor retain more of a “hands-on” property owner role.
  • Avoid highly leveraged deals. A highly leveraged financing package is one in which a small amount of cash is used to purchase a large or expensive property investment. These types of deals can prove extremely risky because a market fluctuation can outpace income.
  • Start out small. Investing in real estate may require more time than investing in stocks. That’s why first-time commercial investors are advised to purchase smaller properties, such as small apartment buildings or single-tenant retail properties. These properties require less initial capital and time commitment, but still provide the experience of ownership and prospect of financial rewards.
  • Stay close to home. Markets across the nation vary as greatly as the landscape of the country itself. New property investors are advised to make that initial plunge into familiar waters. An investor will be more familiar with his or her home market rather than one across a few time zones.
  • Get professional advice. Commercial real estate, like any long-term investment, presents great opportunity and inherent risks. A commercial specialist experienced in appraisal, brokerage, management, financing and other related areas (such as some of the legal considerations of how to protect yourself when making a real estate investment) can prove invaluable to first-time investors in helping to select an appropriate property, minimize risks and chart a long-term path to success. Select a real estate professional who has been educated in dealing with these and other issues which may surface during the anticipated length of time the property will be held.

If you are looking to learn more about commercial real estate, {{cta(‘f453cae7-8218-4e2d-9d00-740348acfdb7’)}} and let us know what other questions you have!