Last Update: December 2023
Owning and renting commercial properties as an investment can be more challenging than owning other types of rental real estate, however, it can also be one of the most lucrative investments if done correctly. Especially with household names like Starbucks and McDonalds as tenants. Below we take a deep dive into everything you need to know about commercial rental properties.
On This Page
- What is Commercial Real Estate?
- Types of Commercial Properties
- Commercial Real Estate Classifications
- Commercial Real Estate Tenants
- Commercial Rental Property Finance
- Marketing Commercial Properties
- Managing Commercial Rental Properties
- Commercial Rental Property Law
- Commercial Rental Property Construction
- Commercial Rental Property FAQ
What is Commercial Real Estate?
Commercial Rental Property Definition
Commercial real estate (CRE) is property (i.e. buildings and land) that is used solely for profit-generating business activities and often leased to commercial tenants for solely business purposes.
Commercial Rental Properties Explained
Commercial real estate is all about properties used primarily for business purposes. Instead of homes or apartments, think of shopping malls, office buildings, warehouses, or restaurants. These properties are designed to generate profit, either from businesses operating there or through rental income. Entrepreneurs and companies lease spaces in these properties to run their operations, serve customers, or store products. From the corner store to the big downtown skyscraper, these are places where commerce happens. So, when you shop at a boutique, work in an office, or grab a coffee at a local café, you’re stepping into the world of commercial real estate.
Types of Commercial Properties
Commercial real estate is a broad and widely used term, but within this asset class are several types of unique sub-classes that each have their own special characteristics. We explore the most common types of commercial properties below:
Buildings where administrative work usually takes place. These often include spaces for Medical Centers and Professional Services (Lawyers/Accountants).
Multifamily apartments are considered “Commercial” if they have five or more residential units and sometimes get into the 100’s of units.
Buildings where the property may have a combination of uses, such as retail, office and apartments.
Plots of land ranging in sizes from small to very large and also type depending on location such as agricultural outside of metropolitan cities, and infill land within urban cities..
Public facing storefronts such as shopping Centers, Malls (both indoor & outdoor), Neighborhood Plazas, Strip-Malls, and In-line retail in commercial corridors.
Often large buildings used for warehousing, manufacturing, and any other type of industrial economic use
These properties primarily serve travelers and include hotels, motels, lodges, cabins, hostels, and any other type of property for overnight stays.
Commercial Real Estate Classifications
Commercial real estate is a diverse sector that offers investors opportunities to generate income through various property types, such as office buildings, retail centers, and industrial facilities. To better evaluate and compare the investment potential of these assets, commercial properties are often classified into three categories: Class A, Class B, and Class C. Each class is distinguished by factors like location, building quality, age, and tenant profiles, enabling investors to make informed decisions that align with their risk tolerance, investment objectives, and management preferences.
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Commercial Real Estate Tenants
Tenants in commercial real estate come from diverse backgrounds, industries, and financial standing, each presenting unique opportunities and challenges for property owners and investors. By understanding the intricacies and dynamics of various tenant types, such as mom and pop businesses, seasonal occupants, and credit tenants, landlords can make informed decisions that contribute to the long-term success of their commercial real estate ventures.
Commercial Rental Property Finance
Commercial Investing Strategies
Commercial real estate investing is a dynamic arena where individuals and firms seek to generate returns through commercial properties. Direct ownership is a common approach, where an investor purchases a property and earns from its rental income or appreciation. Other investing strategies include ground up development, the BRRR method, and other investment centric methods such as note investing, triple-net (NNN) properties, or even join syndications where investors pool their resources to fund larger commercial projects.
Commercial Real Estate Loans
Commercial rental property financing by far has a higher learning curve when compared to all other types of rental real estate loans. However, once understood and establishing an experienced track record, can unlock the greatest source of capital for a real estate investor. Commercial property loans place great scrutiny on the property, deal, and experience of the investor. As such, commercial lenders look at factors such as Loan to Value (LTV) ratio and Debt-Service Coverage Ratio (DSCR).
Top 5 Largest Commercial Companies 2024
The commercial rental property industry not only plays a crucial role in providing the physical spaces for businesses to operate, but also represents a significant investment vehicle for both individual and institutional investors. The largest commercial real estate companies in this sector are characterized by their extensive portfolios, innovative development projects, and their ability to adapt to changing market conditions. These firms contribute significantly to shaping the landscape of cities and towns, often driving economic growth and urban development.
Commercial Real Estate Insurance
Commercial real estate insurance is a specialized form of coverage designed to protect rental property owners and investors from financial losses related to their commercial properties. This type of rental property insurance typically covers a range of risks including property damage from events like fire or natural disasters, liability for injuries occurring on the premises, and loss of income due to business interruption.
Commercial Real Estate Taxes
Taxes levied on commercial rental properties can be both a detriment and benefit. They are calculated based on the assessed value of the property and rates vary widely by location, taking into account the land, building, improvements and usage. Annual tax bills can be a large expense for investors, but can also provide immense benefits through strategies such as cost segregation, 1031 exchanges and allowable deductions.
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Commercial Rental Property News
- U.S. News Reveals 2024 Rankings for Best Hotels
- Rent and Mortgage Rewards Company Bilt Valued at $3.1 Billion
- Zillow Launches New Credit-Building Payment Reporting
Marketing Commercial Properties
Buy, Sell and Lease Commercial Real Estate
At the core of commercial real estate is the buying, selling, and leasing process. Buying a commercial property can be an exciting endeavor to grow your investment portfolio. Selling a piece of commercial real estate can also unlock new levels of growth and release tied-up capital in a property. Leasing is the most important component of commercial rental real estate, as it’s the engine that generates consistent cash flow.
Online Platforms for Commercial Listings
Commercial real estate listing websites across the internet attract millions of visitors every year and streamline the buying, selling, and renting process. Commercial property investors and tenants use these platforms to easily find available properties in almost any market.
Managing Commercial Rental Properties
How to manage a commercial property depends a lot on the size and type of property. If you were to own a single-tenant retail building with a long term triple net (NNN) lease and are knowledgeable about commercial real estate best practices, then maybe self-managing could be an option. Conversely, if you own a 10-unit retail shopping center with a mix of national and local mom-and-pop tenants, then hiring a third-party management company might be a better option.
Commercial Rental Property Law
Commercial Real Estate Documents
Commercial real estate documents are essential for the legal ownership and management of commercial properties, with the commercial lease agreement being the most critical, detailing rent, lease term, and maintenance responsibilities. Additional key documents include commercial lease addendums, letters of intent and other notices like rent adjustments and lease renewals. Property owners also manage service contracts and compliance documents related to zoning and environmental regulations.
Types of Commercial Real Estate Ownership
Since commercial real estate is treated as a business, legal ownership can take many different forms. The most common types of ownership structures for commercial properties are Sole Ownership, Partnerships, Joint Venture (JV) , Corporation, Limited Liability Company (LLC) , and Trusts. Choosing the right form of property ownership is extremely important for reasons such as liability protection, controlling tax liabilities, and staying on top of administrative requirements.
Commercial Rental Property Construction
Commercial Rental Property Maintenance
Commercial real estate maintenance is a critical aspect of construction and property management, ensuring the safety, functionality, and aesthetic appeal of the property. It involves regular upkeep tasks like cleaning, repairs, and landscaping, as well as addressing more significant issues like structural repairs, HVAC system maintenance, and compliance with safety regulations. Effective commercial real estate maintenance not only preserves the property’s value and attractiveness to tenants but also helps prevent costly emergency repairs and legal liabilities possibly arising from negligence.
Hiring Contractors and Service Pros
Hiring contractors and service professionals for commercial real estate properties requires careful selection to ensure quality and reliability in maintaining and improving the property. Property owners or managers should vet potential vendors based on their experience, licensing, insurance, and references, particularly those with a proven track record in commercial projects. Establishing clear contracts with detailed scope of work, timelines, and payment terms is crucial, as well as maintaining regular communication and oversight to ensure that the work meets the property’s standards and legal requirements.
Commercial Rental Property FAQ
How Much Money Can you Make Owning Commercial Rental Properties?
The amount of money one can make from owning commercial rental properties depends on various factors such as location, property type, market conditions, and the effectiveness of property management. Generally, commercial properties offer higher rental yields compared to residential properties, with average returns ranging from 6% to 12% annually, though this can vary greatly. Factors like tenant stability, longer lease terms, and escalation clauses in commercial leases can contribute to a more stable and potentially higher income stream. However, profitability also hinges on expenses such as maintenance, insurance, taxes, and vacancies, making thorough financial analysis and management essential for maximizing returns.
How Do Rental Rates for Commercial Properties Compare to Residential Rental Properties?
Commercial rental rates are often higher and are influenced by factors such as location, property type (office, retail, industrial), market demand, lease length, and the economic health of the business sector. In contrast, residential rental rates are generally influenced by location, property size, amenities, and local housing demand. Additionally, commercial leases often include terms like triple net leases, where tenants pay for maintenance, insurance, and taxes, affecting the overall rental cost, a structure rarely seen in residential leasing. Below is a table comparing rental rates for the two types of asset classes:
|Base Rental Rates
|Generally higher due to larger spaces and business usage.
|Typically lower, based on unit size and local housing rates.
|Often includes triple net leases; tenants may pay for maintenance, taxes, and insurance.
|Typically simpler, with landlords covering many expenses.
|Longer lease terms (often 5-10 years).
|Shorter lease terms (commonly 1 year).
|Influenced by property type, location, commercial demand, and economic sector health.
|Influenced mainly by location, property size, and local housing demand.
|Common to have fixed or percentage-based rent increases.
|Usually subject to local housing laws; often annual modest increases.
|More sensitive to economic cycles and business trends.
|More stable, but can be affected by overall housing market trends.
|Often higher due to scale and complexity; can be tenant’s responsibility in triple net leases.
|Generally lower and landlord’s responsibility.
|Often paid by tenants.
|Usually included in rent or paid by tenants.
How to Get Started With Commercial Real Estate Investing?
First, educate yourself about the commercial real estate market, understanding different property types, market trends, and investment strategies. Second, start work on securing financing which might involve traditional bank loans, commercial mortgages, or investment partnerships, and requires a solid business plan and credit history. Third, identifying the right property is key, focusing on location, tenant demand, and potential for appreciation or steady rental income, and this often involves working with real estate agents or brokers who specialize in commercial properties. Finally, effective property management, whether done personally or through a professional management company, is crucial for maintaining the property, managing tenants, and ensuring a steady income stream.