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.
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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.
Mixed Use
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.
Special Purpose
Examples of special purpose properties include self storage, amusement parks, bowling alleys, parking lots, stadiums, theaters, zoos, and much more.
Commercial Real Estate Classifications
Class A
Class B
Class C
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.
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.
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Commercial Real Estate Investing
Commercial Investing Strategies
Commercial real estate investing is a dynamic arena where individuals and firms seek opportunities to generate returns through various avenues. 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, stocks , or even join syndications where investors pool their resources to fund larger commercial projects.
Commercial Real Estate Financing
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).
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 Marketing
How to 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.
Where to Buy, Sell and Rent Commercial Real Estate Online
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. Those looking to sell or lease commercial properties also benefit from these platforms by getting their listings in front of countless potential buyers and tenants.
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.
About the Author
Ryan Nelson
I’m an investor, real estate developer, and property manager with hands-on experience in all types of real estate from single family homes up to hundreds of thousands of square feet of commercial real estate. RentalRealEstate is my mission to create the ultimate real estate investor platform for expert resources, reviews and tools. Learn more about my story.