Investing in commercial real estate is no monolith. There are different types of commercial properties, and each one is appropriate for a certain type of investor. Also, each requires a different type of strategy to maximize profitability.
Therefore, before choosing whether to purchase a retail property or an office space (for example), you should consider which one is best suited to your overall goal as an investor.
In this article, we consider the different goals of CRE investors and how the CRE types fit into them.
Common goals of CRE investors
What, then, are the common goals of CRE investors? There are at least five:
- Stable income: Some CRE investors prioritize stable and consistent rental income. They want low vacancy rates and prefer tenants who can make long-term commitments.
- Passive income: These CRE investors also desire stable income, but the main priority is that they can earn the income with minimal property management.
- Capital appreciation: These investors are more concerned about the price of the property than the income it can generate. Thus, they want a CRE whose price can appreciate over time.
- High yield: These are opportunistic investors who look out for properties selling at lower prices that they can quickly renovate and resell for profits. They are also referred to as flippers.
Some high-yield investors can also lease out the renovated property for a higher rent than what it was earning before.
- Lower risk through diversification: For some investors, the main goal is to have a diversified portfolio of assets that will minimize their risk exposure. While return is important, risk is not ignored.
Matching property types with investment goals
So, which types of commercial properties are appropriate for these different investors?
Stable income investors
The following property types are appropriate for investors seeking stable income:
- Multifamily properties: With rising mortgage rates, many are renting instead of buying. Thus, multifamily has maintained high occupancy rates. Also, rent has been steadily increasing, and experts expect it to increase further, buoyed by rising demand.
- Retail properties: Retail properties often have multiple tenants. If one tenant vacates, others will keep paying until the vacancy is filled. In other words, it is very difficult for rental income to fall to zero.
- Industrial properties: The rise of e-commerce has increased the demand for warehouses, distribution centers, and delivery hubs. This high demand for industrial properties means a large number of tenants, lower vacancy rates, and rising rent.
Passive income investors
The following property types are appropriate for investors seeking passive income:
- Retail, industrial, and office properties with NNN leases: With triple net leases, the tenants are responsible for operating expenses like taxes, insurance, and maintenance, in addition to the rent paid.
Investors who don’t want to be too actively involved can benefit from these leases.
- Turnkey multifamily properties: These are multifamily properties that already have tenants and a property management team. The investor can start earning rental income immediately without any administrative duties.
Investors who want passive income can also purchase real estate investment trusts (REITs).
Capital appreciation investors
The following property types are appropriate for investors prioritizing rising prices:
- Industrial properties: As rent is increasing, the prices of industrial properties are also rising. This is due to rising demand from e-commerce and manufacturing, as well as limited supply in some important locations.
- Value-add office spaces: Office spaces continue to struggle with high vacancy rates. Investors are using this opportunity to convert vacant spaces into co-working spaces, event centers, art studios, and residential buildings.
Those who can redevelop office spaces into key amenities needed in the community can earn high capital gains.
- Mixed-use developments: These are properties with residential, retail, and office components. Demand for these types of properties is rising in growing cities, and investors who can supply them can benefit from rising prices.
- Data centers: As the AI revolution continues apace, data centers will be in greater demand. Investors in them are poised for high capital gains.
High-yield investors
The following property types are appropriate for investors prioritizing quick, high yield:
- Industrial properties: Since they are in high demand, they can be quickly redeveloped and sold for a high ROI.
- Retail spaces: Retail spaces can also be easily modernized and resold for a high yield.
- Mixed-use developments: Modernizing mixed-use developments can help attract better-paying tenants.
Diversification investors
For investors focusing on diversification, the key is to combine CRE types with stable income and those that provide high capital gains.
If the portfolio is already overweight with those focusing on stable income, there might be a need to prioritize those that provide high capital gains.
Similarly, if it is already overweight with those appropriate for high capital gains, the investor needs to include CRE types that provide stable income.
How to buy the commercial property that fits your goals
Knowing how to buy commercial property in an uncertain economy is crucial, irrespective of the CRE type you prefer.
As banks are more cautious about lending, you need to focus on private lenders like Duckfund.
With Duckfund, you can secure senior debt financing of up to $500 million and equity financing (limited partner or preferred equity) of up to $100 million for ground-up development, pre-development, value-add, and redevelopment projects across all CRE types.
Duckfund also provides earnest money financing for all types of CRE deals. You can complete an application in two minutes and get the funds released within 48 hours without submitting any credit report.
Unlike banks, Duckfund will help you secure quick access to funds without unnecessary paperwork. This will help you compete in competitive markets and build the CRE portfolio of your dreams.
