What is Commercial Real Estate?
The term “commercial real estate” sounds like one big category, but commercial real estate is actually a way to describe several different types of property that are used solely for business purposes. One easy way to determine if you are dealing with commercial real estate is to ask yourself: Is the space rented or owned?
In a commercial building, regardless of its subtype (we’ll get to those in a minute), the space is leased out to a tenant of some type, usually for business purposes instead of residential ones. That’s the first sign you’re dealing with a commercial property. For example, in an office building, businesses rent space so their employees can work in a centralized location. In a retail property, businesses lease space to provide goods and services such as food service (restaurants) and cosmetology (salons and nail parlors).
But what about apartment buildings and hotels? Aren’t they commercial real estate too even though people are living there? Well, that’s where things get a little bit tricky. First off: Yes, apartment buildings and hotels are commercial real estate. Hotels fall into their own category separate from apartment buildings, which are also known as multifamily real estate or, in some cases, multi-unit real estate.
Here are the subtypes of commercial property:
- Office space – professional buildings including skyscrapers
- Industrial space – large properties used for storage, shipping, and sometimes research & development (R&D)
- Retail/Restaurant – small shopping centers, “pads” for restaurants, and malls
- Multifamily – apartment complexes, high-rise apartment buildings, and anything larger than a four- or quadplex are considered multi-family therefore commercial real estate.
- Land – raw and vacant land in the path of future development may be considered commercial property. Some investors consider restaurant pads as land instead of retail.
- Other – everything else! Nonresidential properties like hotels, medical centers, and self-storage facilities. This definition is somewhat open to interpretation. Some investors consider hospitality to be a separate subtype and include hotels and tourist services. Others consider medical facilities to be office space. When you discuss a specific type of commercial property, just be clear with your conversational partner how you are defining things early and you should be fine.
Don’t You Need Millions of Dollars to Get Started?
Good news: You do not need millions of dollars (or even thousands) to get started in commercial real estate! In fact, Think Realty Resident Expert Pamela J. Goodwin recently opened up the details on a deal she did for a restaurant location where she got the entire property under contract for just $500.
Once you have a commercial property under contract, the fun really starts. You can sell that contract to another buyer, which would mean that you never needed any more money than what it cost you to get under contract in the first place. You can also raise money to do the deal or structure financing in a variety of creative and flexible ways.
Do I Need Degrees or Certifications to Invest in Commercial Real Estate?
A lot of commercial real estate investors brag about their certifications, but in reality most of those certificates and licenses, while admirable, are optional specialties rather than essentials. You should check out the regulations for commercial real estate investing in the markets in which you plan to be active, since different states do regulate commercial investing activity in different ways.
Fortunately, commercial real estate, like residential real estate, has a relatively low formal education barrier to entry. Whether you have advanced degrees in another field and are worried about going back to school (you don’t have to) or you don’t have the first diploma, you can still invest in commercial real estate. The important thing is not the degree or the certification but the education. What you will need is a good understanding of the strategies you plan to employ and how to implement them in your target market or markets.
What Kind of Deals Can I Do in Commercial Real Estate?
Commercial real estate is very similar to residential real estate, but the numbers are bigger. Sometimes, the deals are a lot more creative as well because those bigger numbers create a venue that fosters creativity. Just for starters, though: You can wholesale, fix and flip, buy and hold, and rent out commercial real estate, and you can hire expert assistance to handle just about any area in which you are not personally an expert yourself.
Are There Mentors in Commercial Real Estate Like There are for Flipping and Wholesaling?
Of course there are! However, there are a few important things to think about when you are seeking a commercial real estate mentor or educator. For starters, are they truly able to effectively teach you about commercial estate as well as do deals for themselves? Many expert commercial investors have highly specialized knowledge they simply cannot explain to someone without a comparable background. They know a lot, but they don’t make good teachers.
Second of all, is your mentor experienced in the area of commercial real estate that meets your needs? Commercial real estate has a lot of subtypes and sectors. Make sure your mentor is able to speak from experience about the one that fits the bill. A good place to start is with a mentor who is able to explain the basics, the “ground floor” of commercial investing. Once you have some working general knowledge, you’ll be better able to decide what specific strategy will best suit you.
Commercial real estate investing feels intimidating. It’s a lot like looking up at a skyscraper and trying to imagine the view from the top floor without ever having set foot up there. Just remember: You don’t have to fly up there. You can walk in the front door, step onto the elevator, and smoothly ride to the top, progressing through the levels.
Watch lesson one of Commercial Real Estate 101.