Why would a real estate investor want to trade in the diversified protection of a residential portfolio for that of a commercial redeveloper? The answer is relatively simply, but probably not what you expected: they shouldn’t have to. For what it’s worth, the best real estate portfolios are those that are diversified with promising assets. There is no reason redevelopers, commercial or residential, can’t have a portfolio that consists of both. I merely want you to consider the prospects of what a decision to invest in commercial real estate could mean for your business.
I maintain that an investment, regardless if it’s residential or commercial real estate, is an investment in your future: any purchase you make today should set the tone for the rest of your portfolio. It’s worth noting, however, that each strategy is merely a means to an end. Both residential and commercial real estate investing can result in lucrative paydays if executed correctly. The key is to determine which strategy is more suited to your personality and desired career path.
If you are currently investing in residential real estate and are — more or less — curious about the prospects of commercial redevelopment, I recommend educating yourself on the minutia of each. Both are viable business practices, but the one that best suits your business is the one that conforms to your business model effortlessly.
Let’s take a look at some of the reasons you may want to consider becoming a commercial redeveloper:
5 Reasons To Become A Commercial Redeveloper
1. Income Potential: It’s safe to assume that most commercial redevelopers got started in their respective industry for one single reason: income potential. If for nothing else, commercial deals are inherently larger and coincide with a lot more capital. With more on the line, it only makes sense that savvy investors stand to make more on the backend of a deal. According to NOLO, commercial properties “generally have an annual return off the purchase price between 6% and 12%, depending on the area.” Residential investors, while exposed to less risk, don’t stand to make as much money on a single deal as those intent on commercial assets.
2. Professional Relationships: Commercial redevelopers, for the most part, moonlight as landlords for their properties. While it’s possible to flip commercial real estate, most tend to buy and hold, hoping to capitalize on today’s historically high rental rates and low vacancies. That said, the majority of tenants that will inquire about a commercial property are typically small businesses, which bodes well for the property owner. Whereas residential redevelopers are forced to deal with a variety of tenants — some great and some not so much — commercial landlords are usually fortunate enough to choose from a pool of tenants that are prideful business owners. It’s not uncommon for the average tenant in a commercial space to be a Limited Liability Company (LLC), which is more likely to result in a professional business-to-business relationship. As such, exchanges (both financially and communicatively) are more likely to be respectful, timely and professional.
3. Aligned Interests: Again, most of the tenants seeking a commercial storefront are likely cut from a different cloth than those in the residential space. Business owners, for what it’s worth, have a vested interest in their physical property; any prideful business owner will take care of their property like it’s their own — if not better. It’s reasonable to assume that both the owner and the landlord will share the same amount of concern for the property, as each’s income is contingent on how well it is maintained. When both parties have aligned interests, it’s a lot easier to expect a more efficient and lucrative relationship for everyone involved.
4. Predictable Hours: Unlike your typical residential lease, a commercial redeveloper collecting rent can expect predictable hours. For the most part, small businesses operate within certain hours of a given day: they open around the same time every day and close around the same time every night. Residential properties, on the other hand, have become synonymous with the dreaded 24/7/365. Not unlike their residential counterparts, commercial property landlords will be required to meet the needs of their tenants, but the hours you can be expected to remain “on call” are dramatically reduced when business hours are introduced into the equation. It’s safe to assume any calls from your tenants will come during their own hours of operation, and not at three in the morning. Don’t underestimate how important a predictable schedule can be to a commercial redeveloper or landlord.
5. Objective Price Evaluations: As a commercial redeveloper, there is a good chance you will formulate a lot of expectations for your property, not the least of which is income potential. Not surprisingly, most commercial redevelopers commit to the industry because of it’s potential to initiate a lucrative career. What’s more, it’s a lot easier to determine the potential of a commercial property than a residential one. According to NOLO, the potential of a commercial property is a lot easier to predict “because you can request the current owner’s income statement and determine what the price should be based on.” It’s more likely than not that the previous owner laid out a blueprint for your future success. “If the seller is using a knowledgeable broker, the asking price should be set at a price where an investor can earn the area’s prevailing cap rate for the commercial property type they are looking at.” Whereas residential properties are more influenced by biased and emotional decisions, commercial buildings are more objective in nature. For better or for worse, it’s a lot easier to see where you stand on a commercial deal.
While a commercial redeveloper is certainly capable of realizing all of these benefits and more, they don’t come without a caveat. For as lucrative and as exciting as commercial redevelopment may be, it comes complete with an inherent degree of risk that eclipses the typical residential project. If for nothing else, the scale of an average commercial project can contribute to your bottom line in a way that residential properties could only hope to, but the risk exposure is much greater.
I maintain that commercial redevelopment is a great step for those willing to mind due diligence and account for the increased risk. With the right education, it’s possible to mitigate risk and capitalize on the benefits of commercial redevelopment.
If you are more risk averse than the average investor, but still have a desire to bridge the gap between residential real estate and commercial properties, there is another way: real estate investment trusts (REITs).
Making the leap into commercial real estate is a significant undertaking, and not for the faint of heart. However, it is entirely possible to get your feet wet in the commercial industry without physically investing in properties yourself. A real estate investment trust, otherwise known as an REIT, is a “company that owns or finances income-producing real estate. Modeled after mutual funds, REITs provide investors of all types regular income streams, diversification and long-term capital appreciation. REITs typically pay out all of their taxable income as dividends to shareholders,” according to REIT.com. As their names suggest, REITs promote the investment in large-scale properties — not unlike a stock. Shareholders can essentially buy into commercial property investment companies and invest in real estate without lifting a single hammer or nail. At the very least, REITs can give you insight into how the industry works.
What’s more, REITs have done very well for themselves in recent history. Over the course of 2016, REITs have outpaced the S&P 500 and buttressed the market in times of relative uncertainty. As recently as this month, real estate was given it’s own sector on the S&P 500 to commemorate its recent success, and REITs became the beneficiary of incredible exposure. That said, if you are not quite ready to take the plunge and become a commercial redeveloper yourself, you may want to consider REITs in the near future.
I maintain that those who can competently invest in a residential property are already well-equipped to make the transition into commercial real estate. The jump, big and intimidating as it may be, is entirely possible for those that apply themselves to learning the nuances that are unique to a commercial redeveloper.