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Working with Investors, Developers & Users of Commercial Property

Instructor: Eileen Cappelloni

Eileen worked for the Orange County Asssociation of Realtors for 31 years. She has written real estate courses and exams for other publishing companies

This lesson will explain how to identify the goals of investors, developers, and users of commercial and industrial property. You'll also learn about the different types of income properties and the interests of commercial purchasers.

What Is Commercial Real Estate?

Commercial real estate is property that is generally leased for business, retail or industrial purposes and involves the purchase and/or development of land or buildings that are constructed or developed with the intent of renting out space to commercial tenants. Almost all commercial properties can be categorized as either office space, retail space, industrial space, multifamily, and special purpose buildings.

Most new investors share a common goal; they want to earn lots of money with very little effort. Unfortunately, it almost never works that way.

Dawn Anders came from a family of successful commercial real estate investors, and she thought she would simply be able to choose a commercial property by asking a few questions, speaking to a few investors and choosing a project that appealed to her.

Reasons to Invest in Commercial Real Estate

The commercial real estate agent Dawn chose to work with, Elizabeth Fox, explained that investing in commercial real estate can be financially rewarding and personally satisfying. She explained that each investor has several reasons for choosing to invest in commercial property; it can be for:

  • Tax benefits
  • Future wealth
  • Diversification to other investment properties
  • Higher potential income
  • A lower turnover rate than residential because longer lease periods equal more consistent income
  • Less competition because commercial investment is more complicated than residential leasing

Disadvantages of Investing in Commercial Real Estate

But there are disadvantages as well:

  • Poor liquidity
  • Higher risk
  • More management time
  • High capital requirements

Counseling a New Investor

Elizabeth knew that Dawn was a new investor and needed a great deal of guidance. Potential investors like Dawn need to:

  • Determine how much money they are willing and able to invest
  • Decide how much time they are prepared to give to a project
  • Listen to advice from experts
  • Educate themselves

Types of Investment Property

After speaking with Elizabeth, Dawn was beginning to learn just how much she needed to know if she wanted to become involved in commercial investment property. She and Elizabeth worked together to help determine what type of commercial property she would be most interested in.

Raw Land

Raw land can be very profitable if an investor is willing to become knowledgeable about an area. Raw land is a considerable risk because it does not typically provide immediate cash flow. Timing is important because the longer the property remains undeveloped, the lower the rate of return tends to be.

Office Buildings

One of the reasons many investors prefer office buildings rather than residential apartment buildings is that there are generally longer-term tenants, and there are fewer rent collection problems.

Strip Malls

Strip malls can be very attractive to investors because they often contain retail stores, offices, or restaurants and can be easily converted to just about any type of commercial establishment with relatively little expense.

Industrial Properties

Industrial properties are generally found near airports, major business hubs, and railroad lines. They are usually located on the outskirts of large cities. Elizabeth discouraged Dawn from starting out with this type of investment property, since they are often special purpose buildings and are subject to long periods of vacancy during unfavorable markets.

Next Steps to Investing

After a considerable in-depth consultation with Elizabeth, Dawn decides that she would be most interested in investing in either a strip mall or a well-established office building. Elizabeth then provides her with the next steps to consider before investing:

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