Investing in commercial real estate: strategies and challenges
Commercial real estate has long been a popular investment destination for both individuals and businesses. Find out more about the benefits of this type of investment, the disadvantages and risks, the key success factors for investing in commercial real estate, and how to get started on the path to investing in commercial real estate
Investing in commercial real estate is a promising market, especially for those seeking financial development and portfolio diversification. Even in times of economic uncertainty, commercial real estate has the potential to deliver the consistent returns that investors expect from their assets. Therefore, the amount of capital invested in commercial real estate in the world is quite significant.
However, despite the many advantages, the commercial real estate market has certain risks and features that you should be aware of before making your investments. What challenges can an investor face and what strategies are better to choose? We tell in detail in our material.
What is commercial real estate?
Commercial real estate encompasses a wide range of property types, each with its own unique characteristics and potential for investment:
- Office buildings (high-rise towers, suburban business parks and small office spaces) - objects that are leased to corporations or firms to place their own headquarters or offices here.
- Shopping centers and stores - offer retail businesses the opportunity to rent space to sell their own goods or services.
- Industrial facilities such as warehouses, distribution centers and production facilities are an important element of production activities.
- Multi-apartment residential buildings that are used for rent. Investments in this sector can offer stable rental income.
- Specialty real estate – eg hotels, medical facilities (hospitals/clinics), leisure facilities (eg resorts or golf courses) etc.
Having analyzed the types of commercial real estate, the investor will be able to choose the area that will suit him as much as possible from the point of view of finances and available experience.
Advantages of investing in commercial real estate
- High return on investment – commercial real estate provides a good return on investment, especially in areas with high demand for housing. Commercial real estate offers the investor more income than even residential real estate.
- Property Maintenance - Most commercial tenants are committed to keeping their premises in good condition, reducing the need for frequent repairs and saving you money.
- Longer Lease Term – Commercial real estate offers longer lease terms than residential real estate, providing high cash flow stability.
- Short-term cash flow and long-term income: the investor will be able to receive both short-term income from renting real estate and long-term income from capital gains over time.
- Stability in certain sectors: Some commercial establishments, such as government agencies and healthcare facilities, can offer stable work even during economic downturns.
- Portfolio diversification – this asset class will help distribute risk between different sectors and regions.
- High control over the investment fate - you will be able to independently control the rental procedure and personally look for clients.
- Tax benefits – mortgage interest payments and operating expenses can be deducted from your taxable income, reducing your overall tax liability.
Disadvantages and risks of investing in commercial real estate
- High initial fees – investing in commercial real estate requires significant initial capital, unlike residential real estate.
- Time investment – managing commercial real estate requires more time for maintenance and security measures compared to residential real estate.
- Lack of liquidity – buying and selling commercial real estate takes a long time, making it less liquid than other investment options.
- Additional expert advice – you may need expert advice, for example, to resolve complex legal issues.
- Longer Tenant Search Period – Unlike residential properties, which often have a constant flow of tenants, commercial properties can take longer to find suitable tenants. This can lead to periods when your property is vacant, causing a loss of income.
- Influence of the general economic situation - the value of commercial real estate is closely related to the general state of the economy. During a recession or economic instability, demand for commercial space may decrease, leading to lower rents and potentially lower property values.
- Operational risks – too high maintenance costs, property management issues such as tenant disputes, etc.
Useful expert advice
Anton Taranenko is the founder and CEO of Visit Ukraine and Visit World online platforms and the owner of the international development company AntaGroup:
Commercial real estate is a building or premises used for commercial purposes, such as shops, offices, restaurants, hotels, warehouses, catering establishments, etc. This category of real estate is of interest to investors and entrepreneurs because it can generate stable income in the form of rent or guaranteed proceeds from the sale of real estate.
Indeed, commercial real estate can provide stable and high rental income, especially if you have reliable tenants for a long term. Many commercial lease agreements have a duration of several years, which is guaranteed to provide a stable income.
There are many types of commercial real estate, allowing investors to choose the one that best suits their goals. Before investing in commercial real estate, it is important to conduct a thorough market analysis, develop a strategy and have a clear understanding of your financial goals and risks. It is also useful to consult with real estate and financial experts.
Key success factors for investing in commercial real estate
Before you decide to invest in commercial real estate, you need to consider whether you are investing to earn a profit from the property's appreciation over time, or are you simply looking for a stable income.
Also, for successful investment in commercial real estate, you need:
1. Assess the current economic conditions, because commercial real estate is significantly dependent on them.
2. Analyze the possible success of the enterprise that plans to rent premises.
3. Find out the value of the property - this will help you understand how much money you will need to invest in the property and whether the investment is financially sound.
4. Keep up with industry trends – The requirements and features that tenants and businesses are looking for can change and your property needs to be adaptable to these new requirements. Knowledge of industry trends allows you to make appropriate adjustments to your investment strategy.
5. Choose the right location – When you are thinking about investing in commercial real estate, the most important thing to consider is the location. Choosing the right neighborhood can make a big difference in how much your property will increase in value and how much income you can earn
Commercial real estate can be an ideal option for passive income, as companies move less often than families in residential real estate. Also, commercial real estate often increases in value faster than residential real estate, making it an attractive option for long-term wealth.
How to start investing in commercial real estate?
A few key steps to help you start your journey in this lucrative market:
1. Learn more about the types of commercial real estate available, as each has its own unique characteristics and return potential.
2. Research the market and identify areas with strong growth potential and demand for commercial real estate. Analyze the following factors – population growth, employment opportunities, infrastructure development and local laws.
3. Work with qualified professionals - real estate agents who specialize in commercial real estate, attorneys familiar with commercial transactions and contracts, and experienced property managers.
4. Determine financing options in advance to determine the amount of capital you will need for your investment. Commercial loans usually require a higher down payment compared to home mortgages.
Where to find a profitable object for investment in commercial real estate?
Commercial tourist real estate is hotel complexes or groups of apartments that are located in tourist attractive places or regions.
Indonesia, particularly the island of Bali, is a promising destination for investment in tourist commercial real estate. According to experts, the amount of net profit from the sale of apartments purchased in Bali during the construction phase will be 44% in three years. When renting real estate, you can return the investment in 5-6 years. However, the investor should carefully choose a developer, it is better if he has international work experience. It is also important to pay attention to the type of real estate and the location. A profitable investment option in Bali is the purchase of premium apartments ANTA Residence Canggu from the reliable international developer ANTA Group. The advantage of the complex is the management of a professional management company, the work of which allows the investor to receive regular income without personal participation.
Turkey also has an attractive real estate market where you can get a high return on investment. Most investors prefer to buy business-class apartments in Turkey, because such an investment is a good option, both for living and for investments. Read more about the advantages of investing in real estate in Turkey here.
Investing in commercial real estate requires careful consideration, but it also offers significant rewards. By staying abreast of market conditions and using calculated risk-taking techniques, following the principles of sound investing, one can easily succeed in the commercial real estate sector.
Daria Rogova, Head of Insurance at Visit World
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