1. Why Invest in a Commercial Real Estate?
Risk has always been a cornerstone of investment. Many investors think of having a flourishing investment portfolio. But one often finds the hackneyed terms of investments like stocks, bonds, ETFs, Mutual Funds & others. This trend of investment recurs because there is a feeling of security and stability involved in these options. But in reality, there is an element of risk involved in these too.
Adding real estate to your investment portfolio will give the much-needed edge. Commercial real estate is considered to be a hard asset with a scarce resource. It has an innate value, and its value appreciates over time.
Investing in Commercial Real Estate (CRE) can yield benefits like a new source of cash flow, potential long-term appreciation, and proper diversification of the investment portfolio. Let us try balancing our investments as someone has said- don’t put all your eggs in basket.
Let us paint a broad picture by looking at the advantages of investing in Commercial Real Estate.
A potential Source of Income:
The earning potential for investment in CRE is much more. If you look at the figures, then the commercial property usually has an excellent annual return on the purchase price depending on the area.
Regular & Consistent Returns:
The lease for any commercial property is for long term, a minimum of five years. The owner of the commercial property has an assurance of consistency of returns. Also, lease agreements come with a clause of yearly appreciation of the rental value irrespective of market value making it more attractive.
Choice of Tenants:
Commercial Real Estate (CRE), with an excellent location invites tenants like banks, corporates, business houses, or retail shop chains. Dealing with corporates always advantageous as there are no hassles towards daily operations as well as chase for rent.
Zero Furnishing Cost:
One of the critical advantages of having a CRE Investment is zero furnishing cost of the property. The investor can hand over the property to the corporate tenant who can furnish the property as per their own choice or taste. The reason behind this is branding, which is essential in a commercial space.
Breaking free from Parallel Earnings:
Earning from any particular source of investment may tend to become positive or negative if there is some fluctuation in the financial markets. Whereas, investment in CRE is not influenced by the performance for any other source of investment.
A Concrete Physical Asset:
Many people believe that real estate is more physical and tangible because you can touch, see, and feel it. In contrast, stocks, bonds, Exchange Traded Funds (ETFs), & other sources of investment may not be as a feeling appealing for some people as they can’t trust them. In case if there is some damage to the structure created on the invested property, then the land is still available for future use.
Tax Benefits:
An investment in CRE can very well have its share of tax benefits by reducing or eliminating some capital gains. For tax purposes, a depreciation in the value of buildings over time can help reduce the yearly taxable income. An investor is depreciating his property for tax purposes while appreciating the same for investment. Thus making it a unique feature of investment in CRE.
Evading Inflation:
While other investments such as stocks, bonds, or mutual funds bring in diminishing returns during a boom, investment in CRE can easily avoid the long-term impact of inflation.
Should everybody invest in commercial real estate? Is it favorable for everybody? The answer to this question is a personal attribute. But we have seen the many benefits of investment in CRE. The investment can be advantageous in comparison to the investment in residential real estate, but it can get a little trickier as well. However, though the investment in CRE is extremely rewarding, it requires a lot of patience and comes with more risks.
2. How to get started in Commercial Real Estate Investing?
CREs are usually leased to tenants for operation of their businesses. CRE includes tenants of all kinds like space for offices, banks, malls, restaurants, and convenience stores or supermarkets. It has become an appealing investment option because of its coherent returns, pliable source of income, and growth prospects.
Though investing in CRE is attractive, there are some common hiccups, mistakes, and risks involved. Therefore, it is important to you know how to get started and what should you look out for before investing in CRE especially for the first timers.
Financial Ineptness:
It is always advisable to keep a track of your capital as well as Your expenses for having an idea of the amount of cash which you can invest.
Realistic Goals:
Every investor has a different set of goals. These goals should be realistic in nature considering all the factors and should have a realistic deadline.
Knowledge of Risks:
Create a perfect strategy which determines your risk bearing attitude.
Exercise Due Diligence:
A prospective buyer can always conduct thorough research on CRE regarding the actual investment opportunity, availability of finance, property inspection, documents, tax returns, profit, and loss statements from the previous owner, survey reports, feasibility study, and so on.
Updated knowledge of Market Cycles with Latest Trends:
To invest in a CRE, it is important to learn how the cycle of the real estate market works and the latest trends in the sector.
Proper valuation of Commercial Real Estate:
Every CRE investment depends upon the supply and demand, yield from it, and the overall profitability of each sector as all these parameters vary greatly.
Ensure you have a Capital Reserve Funds & a Contingency:
A capital reserve fund can help a person through phases of unexpected expenses like lease or rent hike, change in management, renovation, change in location or building a new structure.
3. Pros & Cons of Commercial Real Estate Investing
They are the pros and cons of CRE investing. So, let us have a look at them.
Pros of CRE Investment:
In a commercial property its earning potential depends on the type of property like shop or office space and parameters like right location and right price.
A. Tenants With High Professionalism:
Tenants of CREs are usually corporates, business houses, banks, retail chains, and so on. Since they belong to a corporate culture, they know how to deal professionally with the owner/investor.
B. Stable & Regular Returns:
Usually a commercial property carries a lease agreement for a long-term that is a minimum of 5 years with a clause of increase in the yearly lease whatever the market conditions be.
C. Leases With Flexible Terms:
Lease agreements with CRE are very flexible in their terms and the tenant is liable to handle all property related expenses, real estate taxes, and so on.
D. Almost no Cost of Furnishing:
The furnishing cost of CRE is almost nil as you hand over the unit as it is to the tenant. Tenants who are usually corporates or business houses or banks or retail chains can furnish the property with the layout of their own.
E. Maintenance of the Property:
Tenants of CRE have an interest in maintaining the property to live up to the expectations of the locality or area in which they operate further help to enhance the value of the property for the investor.
Cons of CRE Investment:
Below given are a few disadvantages of the investment in CRE
A. Initially Costly:
A commercial property is costlier than a residential property as it may need some maintenance expenses.
B. Difficult Buying Process:
Thorough research and detailed planning must be done to buy a commercial property as against a residential one. The location, demand and supply for a CRE in a specific location, the nature of the business are the important criteria which a buyer must investigate and judge the property on their basis.
C. Impact of the Economy:
The fate of commercial property is linked with the fluctuation in the economy. If there is a slack in the economy, then the demand for commercial space reduces and vice versa.
D. Higher Rate of Interest Loans:
In case if an investor wishes to use a loan for buying a commercial property then he will have to get the same at a higher rate of interest.
E. Ratio of Loan to Value (LTV):
The commercial property has an average LTV of 60% in comparison to 80% for residential properties making it costlier.
F. No Tax Benefits:
There are no tax benefits on the purchase of a commercial property based on a loan as against a home loan thereby increasing the overall cost of borrowing.
G. Not Easy to Sell or Find a Tenan:
A commercial property may pose a problem of non-availability of a good buyer or a tenant. Selling may take a longer time. Considering the size of the commercial property.
H. Maintenance of CREs:
An investor, must look into the manner of the property conservation and maintenance as it influences investment returns. Though it is riskier to invest in CRE in comparison to a residential property, once you have bought it you have unearthed a treasure for yourself.
4. Should I Invest in Commercial Real Estate?
Investment in commercial real estate is gaining popularity in the real estate segment of investment. Real estate investment has its own complexities by way of issues in liquidity, maintenance, transparency, and high prices. For anyone who wants to invest in the CRE, a thorough consideration must be given to the risk bearing capacity, the type of investment whether long term or short term, and the purpose of investment.
The potential buyers of CRE can be
- Business owners in need of new or larger premises.
- Investors who are looking forward to expanding their portfolio.
- New investors to CRE who are interested in buying into a portfolio.
5. Why is Commercial Real Estate So Expensive
Commercial properties are expensive in comparison to residential properties. There are many factors which one can consider proving the expensiveness of a commercial property.
Commercial properties are usually large in size, more difficult to build, needs a lot of capital to build, as they provide more substantial services and are resourceful. Commercial properties are rented or leased mostly to corporates because they can afford to pay more rent or go in for a longer lease tenure.
6. Features of a Profitable CRE Investment
Real estate investment is a tough call to take and therefore it is very important for a foreign investor to do detailed research before taking a plunge into the investment.
Let’s have a look at some of the features of a profitable CRE investment
- Location is very good for rent and capital appreciation
- A good Quality CRE attracts a premium quality of tenants.
- Demand and Supply are proportionate to each other in CRE.
- Comparison of rents between the current ongoing market rate and the rate or rent which is being demanded from the investor.
- Quality of tenants pay rent on time, also pay higher deposits, and stay for a longer period there by increasing the value of the property.
- Structure of lease with a 9 year or a 15-year lease with rise every 3 years or 5 years.
- Security Deposit for any CRE varies between 10 to 12 months of the rent
- Diversification helps. Investing in multiple properties will reduce the risk factor at the property level as well as there will be a variety in income.
- An investor need not to worry about the interiors or the furnishing of the property. It all depends upon the tenant’s choice, taste, and company guidelines if any.
Keeping these features in mind let us now learn how to make money in CRE.
7. How to Make Money in Commercial Real Estate?
Following are the ways in which you can make money in commercial real estate even if you are walking on a tight budget
- Publicly traded REITs are a safe bet to purchase their shares.
- If you want to start small, then try joining another investor for buying a smaller apartment or building.
- Buy bank-owned properties that are taken back by banks for foreclosure.
- Become a powerful money lender.
- Join a group of crowdfunding individuals
- Buy a CRE which is a pre-foreclosure property. These properties are those where the owner is having several mortgage payments due and therefore properties are about to be foreclosed.
- Auctions are helpful in finding out lucrative CRE properties. Buy properties that are being auctioned by court procedures.
- Here is an interesting term called the ‘lease option sandwich’ which allows an investor to sell the property without being the owner of it.
8. A Comparative Study with Traditional RE
Commercial Real Estate Vs Residential Real Estate
The major technical difference between residential and commercial property is that a residential property relates to family homes or residences. Examples for which are duplexes, condos and quadruple access. Whereas a commercial property is for commercial purposes only and not for residences. These properties are rented to offices, retail outlets, industrial or business houses, malls, or hotels and even hospitals.
Another difference between the two is that a residential property is a single unit property whereas a commercial property is a multi-unit that is having five or more units at a stretch.
Type of tenants attracted by the residential and commercial property are strikingly different. While residential properties are typically rented out to families and individuals, commercial properties are leased out to professionals and business houses.
Each property arrives with different kinds of opportunities. Commercial real estate awards it’s investors with high monitory gains whereas residential real estate allowed its investors to use the property to its maximum potential.
Benefits & Drawbacks of Investing in Commercial Property
Following are the benefits and drawbacks of investing in a commercial property. The reason for giving a comparative study is to prove that there are more benefits than drawbacks of investing in CRE.
Benefits
- Earns a higher rental yield plus returns
- The lease term can be longer i.e., Nine years to fifteen years
- The property can be unfurnished or with minimum furnishing
- Value of a CRE is not volatile
- The premium quality of tenants
- Limited hours of operations ensure an early closing of the CRE units or facilities.
- Flexibility in the lease terms towards security deposits and rules for termination
- Regular steady income flow with the uninterrupted yearly rise in lease.
- Excellent appreciation of the asset value in case of holding it for a long time
- Provides protection against inflation
Drawbacks
- The capital values of CREs tend to remain stable for a longer duration
- The property may be required to have a specific minimum size for being commercially viable
- May be difficult to sell or rent for the want of appropriate buyers
- There may be an initial bigger investment.
From the above comparative study, one can see that investment in CRE is highly beneficial and buying a real estate is not only the best or the quickest or the safest way but the sole way to become rich.
9. CRE Due Diligence and Things to Consider
Due Diligence is a process of doing thorough research before buying the property. It is a process where the investor investigates in detail, checks, and verifies any important information relating to the property before giving it consideration.
Due diligence process can be categorised into five steps followed by the investor in any order. Let us have a look at them.
a. Operational Due Diligence:
This step is taken to ensure that the investor has the best team available to execute his business plan. It involves hiring professionals, selecting an appropriate property manager, going into the details of the existing management of the property, investigating the lease terms, going through the local market competence, and the types of tenants and their affinity with each other.
b. Financial Due Diligence:
It requires to investigate property’s finance by looking into the details of the property’s cash flow ensuring that it matches with the seller’s representation of income and expenditure and helps in determining the sustainability of the property’s rent.
c. Physical Due Diligence:
Appointment of a certified engineer and an appraiser is done to visit and physically inspect the property. The engineer will inspect the property’s current physical condition; need for any repairs or renovations, and so on.
d. Environmental Due Diligence:
A geologist identifies any potential environmental issues, the property’s historical use, any environmental contamination in the past or any future contamination, state of the site and the underlying soil, the groundwater and soil testing and the actual condition of the land at the time of ownership prior to the acquisition of the property.
10. Understanding CRE Investing Loans & Finance
Let us have a look at how a commercial real estate loan differs from residential loan by way of its characteristics and what do the lenders look for.
Individuals vs. Entities:
Residential mortgages or loans are usually given to individual borrowers. Commercial real estate loans are offered to business entities like corporations or developers or partnerships funds and trust
Schedules for Loan Repayment:
A residential loan or a mortgage is a type of amortize loan in which repayment is done through regular instalments over a period of time.
Loan- to-value Ratios:
Loan to Value Ratio shows (LTV) is a measure of the value of a loan as against the value of a property. For both commercial and residential loans, borrowers with lower LTVs are the most qualified for the most advantageous financing rates available as against those with higher LYVs.
Debt-service coverage ratio:
Commercial lenders as against residential lenders consider the Debt Service Coverage Ratio (DSCR) to compare the net annual operating income of the property to its debt service annual mortgage which includes the principal as well as the interest.
Interest Rates and Fees:
Commercial loans usually bear a higher rate of interest as against residential loans.
Pre-payment:
A commercial real estate loan as against residential loans maybe designed to have several restrictions on its prepayment.
11. CRE Investing Return Potential – Rental Income, Operating Income, IRR & CAPRATE
There are many methods to calculate and assess a property’s present or projected potential returns. Some of the major concepts to understand the calculation of CRE investment returns.
Net Operating Income (NOI):
Net Operating Income is the cash flow that is earned from a rent over a given period of time minus any cost or fees which are associated with the ownership of the property.
Capitalization Rate (CAP Rate):
A cap rate measures a property’s natural rate of return for 1 year without considering any debts. A cap rate is expressed in percentage and is the most common valuation method for investment in real estate.
Internal Rate of Return (IRR):
IRR is used for the evaluation of the profitability of an investment in CRE through its lifetime. It is represented as the average annual return percentage. The calculation of IRR is necessary for asset valuation today to determine its value in future.
Debt Service:
A debt service refers to the amount of payments which are required to acquire a loan. This payment amount varies according to factors including LTV ratio. The greater the amount of debt, the higher is the risk of investment.
The above useful concepts are the general thumb rules which can give an investor a starter towards an investment opportunity.
12. Best Cities for Commercial Real Estate
Currently the CRE sector is experiencing a boom even during the economic slowdown and the real market in the country.
Investments in commercial real estate includes investments in office space, retail space, and floor space for the construction of huge malls, multiplexes, etc. Factors that influence the selection of right CRE investment is the location of the property, its infrastructural facilities, and the property trends in that area.
Following are the best destinations for investment in CRE in India.
Chennai CRE Market:
Chennai, the gateway to South India has become an industrial hub in the Deccan area of the country. The affirmative policies of the state government, growing infrastructure, and availability of manpower has made Chennai one of the best destinations for investment.
Bangalore CRE Market:
The presence of IT companies in Bangalore or Bengaluru has given it the name – Silicon Valley of India. Moreover, many companies from the automotive, manufacturing sector, and e-commerce are looking at the Bangalore CRE market for setting up their businesses.
Hyderabad CRE Market:
Emerging as a next IT hub in the South of India, Hyderabad CRE market has also been experiencing high demand in rentals. Rapid development of the city by way of infrastructural facilities and connectivity with the rest of the country has encouraged multinationals from the IT sector to establish their businesses here.
13. Commercial Real Estate in India 2020 CRE Outlook
Real estate sector in India has been experiencing a slump due to the overall slowing down of the economy. However, investment in commercial real estate has witnesses a hike since 2019 and is continuing to do so.
Logistics real estate, an offshoot of the commercial real estate in India is also likely to see heavy investments. Consumer durables, fast moving consumer goods, and other manufacturing firms are demanding smaller houses across India to be tax efficient while setting up their businesses. Many logistic companies with single warehouses are now shifting to multi-client and multi product models.
Trends & Insights in CRE Investing:
Real estate sector in India is experiencing a contrast. While the investments in CRE are having a ‘ball’, residential developers are witnessing their worst time ever. India has finally introduced its first REIT.
Following are the trends in the CRE investments:
- There is a high demand in Office spaces and that too in the co-working spaces in the Asia Pacific region.
- The co-working sector occupies 3% of the total working space in the Asia Pacific region and in India it is particularly concentrated in Delhi NCR, Bangalore, and Mumbai.
14. Commercial Real Estate Return on Investment
return on each of his investment. The higher is the return, the more is the earning and the more worth is the investment. There are 6 different ways to boost the rate of return on any CRE investment.
- Decrease the vacancy and increase the number of units or the time of collection of income from rents thereby increasing the net operating income
- Increase the rents regularly to match the inflation and also reflect the costs which are related to the property such as insurance, property taxes and utility costs.
- Decrease the expenses after the ownership of a poorly managed property while trying to increase the rate of return.
- Add additional streams of revenue create another additional source of revenues like collecting late fees, charging rental fees for parking or garage space and so on.
- Improve the property to add value and justify an increased rent or even be helpful for getting new tenants.
15. CRE Investing Online
To invest in commercial property online, without owning a physical property, then take a look at the following ideas:
Commercial Property Real Estate – ETFs:
Investing in ETFs can be smart as well as a liquid way to invest in new upcoming construction projects which are commercial.
Commercial property real estate mutual funds:
They are highly liquid in nature and have low cost of management.
Loaning money to real estate investors:
Investing in CRE has an option of lending or borrowing money.
Commercial property construction company shares:
One can purchase shares in the commercial construction companies.
Commercial property real estate company shares:
There are some companies that specialize in buying and managing commercial properties. Investing in such companies as an individual investor though the risk factor is remarkably high as well as the returns.
16. Investing in CRE without Buying a Property
Some small-time investors often wonder how to invest in commercial real estate with little money, but following options are sure to attract them
Real Estate Investment Trusts (REITs):
Investing in REITs is like investing in a stock. An investor can give money to a trust or corporation which in turn purchases a property and gives out dividends.
Crowdfunding Platforms:
These platforms cater to commercial as well as residential real estate. As these investments are non-liquid one can’t sell them easily and it is highly dependent on realty market variables.
Fractional Ownership:
It is a common investment structure catering towards expensive assets such as aircraft, vacation properties and sports cars. An investor and a fractional owner own a part of the title. Fractional Ownership increases the value of the asset as well as the value of the shares in the investment.
17. Why Choose Asset Yantra for CRE Investment
Investment Risk Mitigation:
Certain key actions can help an investor weather a variety of market conditions while achieving his long-term objectives. They are as follows:
Asset Allocation:
An appropriate asset allocation means the way in which the investment portfolio is way trying to meet a specific objective. Try to know about its possible risks, rewards, and the investment time frame.
Portfolio Diversification:
Portfolio Diversification involves selecting a variety of investments to reduce the risk on investment. A variety of investments should be selected from the major class of assets for example, stocks, bonds, cash equivalents, and so on.
Long-term Tenants:
Treat tenants as stakeholders and keep them happy to grow the investment business and offer long-term leases for a steady income over a long period of time.
Prime Location:
Location plays an especially important role as it leads to earning returns on investment and for earning out of its sale.
Need for Efficient Commercial Real Estate Property Management:
CRE property management companies perform a variety of tasks for their clients, including analysis of the portfolio, forecast of the market, advice for investment, implementing investing strategies, and analysis of performance. At Asset Yantra we assist our investors with
- Prioritizing their protection and benefits in every aspect
- Providing relevant and detailed information on various choices of investment
- Provide a smooth and transparent investment process for the asset matching investment objective
- We look out for options and take steps to maximize the net ROIs
- With the help of a dashboard document vault and tools for better monitoring, we track the growth of investment for our investors
- Our assessment team supports the asset cycle of our investors from start to finish
For our stakeholders, we, at Asset Yantra take the following care:
- We process every transaction and dealings with full integrity
- Our processes and tools are transparent throughout the system
- We exercise empathy towards our stakeholder while achieving their rightful objectives.
Higher Returns:
At Asset Yantra, an investor gets access to some of the trendiest sectors of CRE like Co-living, residential and commercial real estates. A thorough due diligence is exercised to make a list of meticulously curated high growth potential assets, investigation of all the potential assets for our investors and to cover the prime areas of major Metropolitan cities covered in our list of assets. We, at Asset Yantra, offer assets with high capital appreciation as well as regular rentals.
Product Flexibility/Custom Products:
We at Asset Yantra, offer product solutions which are customised as per the investor’s needs. Every investor has a different objective to invest. Therefore, we offer different products, various locations, selection of tenure or preferences to risk.
18. Our Offerings (Investment products, Strategy for investment)
Every Investor invests in a CRE with a motive and objective of his own. We, at Asset Yantra offer a variety of products as a solution to their investment apprehensions.
Following are the different CRE Modules which are offered for CRE investment at Asset Yantra:
Growth Module:
This is designed for investors who want a long-term investment value. This module is an early stage investment option in which investor benefits by low investment price and high return.
Growth Plus Module:
This is prepared especially for investors are looking to generate income through short term investment product. These investors generate rental income by a collection of ownership of properties.
Yield Module:
This is designed for those investors who are attracted towards seeking regular passive income. It is a long-term product which is offered with good capital appreciation as well as a steady rental income.
19. Types of CRE Offered
Asset Yantra offers a variety of residential and mixed residential real estate investment options in CRE including office, industrial, multi-family (including co-living and senior housing) and retail real estate.
20. Properties
Presenting the properties and their locations
Asset Yantra have residential and mixed residential properties at Bangalore, Hyderabad and Chennai which include all the three modules of investment categories. They are highly appealing and an investor would find it irresistible to go through our website for any further details
Commercial Real Estate Investment FAQs
You can invest in three different ways in a commercial real estate. Firstly, you can directly buy an office space from a developer or secondly, buy share as a commercial developer from stock market investor or you can invest in a real estate fund forecast commercial real estate.
The rental yield for a residential property is much lower at 3-4 times than for the commercial property which is usually 9-12 times.
The property agreement has to be registered within four months of the date of its execution with the sub registrar of assurances under the provisions of the Indian Registration Act.
The liability of paying a stamp duty rests on the buyer unless there is a clear agreement to the contrary. As per section 30 of Bombay Stamp Act 1958, the reliability for payment of stamp duty rests on the buyer.
There are two types of costs involved – the initial cost and the continuation cost. The initial cost fees include Professional fees of the lawyer and surveyor, landlords legal fees, legal cost such as registry cost or cost for searches, cost price of the premises or any initial lease premium, any stamp duty and land tax, etc. The continuing costs includes rent and service charges, insurance, utilities, business rates, maintenance, and repair cost.
One should check the approved layout plan, ownership document, approved building plan, and a title clearance certificate from the lawyer before buying a property.
Investment in commercial properties and their return depends on the location and the overall economic environment for such properties in the country. Some high-end commercial properties where initial investment would also be higher will earn good returns positively. However, one should check for all the risk factors before going in for investment in the commercial properties.
Yes, with approval from the Reserve Bank of India, an NRI may hold any commercial property in India acquired by way of inheritance from a person who is a resident outside India. Conditionally they should have acquired such a property in accordance with the foreign exchange law or under FEMA regulations.
In case if it is a short-term rental then the maintenance and repairs cost belong to the owner. Also as the property belongs to the owner the responsibility lies on him for any internal, external or structural repairs unless he has made an agreement with the terms ‘Full repairing and insurance lease’.