Many real estate investors begin their journey with small residential properties. Once they feel confident, they start thinking about including commercial real estate, but sometimes there’s a lot of confusion about the switch. Investing in commercial real estate can feel intimidating, but the opportunities and returns can be much bigger.
Here are six practical steps to help you start investing in commercial real estate.
But First, Definitions
What is the difference between residential and commercial real estate?
Residential real estate includes single-family homes, which is probably what came to mind right away for you. But it also includes any housing property with 4 or fewer units. Duplexes, small apartment buildings, and small townhome groupings are all considered residential.
Commercial real estate is basically everything else. For most people, warehouses and other industrial properties are the only obvious fit in this category. But commercial real estate also includes offices, retail spaces, storage unit properties, government buildings, any business (like wedding venues, hotels, or golf courses), AND any housing property with 5 or more units. That means that apartment complexes, large townhome communities, boarding houses, or even the old duplex that was turned into a 5-unit all count as commercial properties, too.
1. Start Small
Commercial real estate magnifies your profits, yes, but it also magnifies your mistakes. For investors who are new to the space, it’s wise to test the waters with a smaller property. Think something like small office buildings, a 2-unit retail storefront, or an apartment building that’s under 10 units.
This approach lets you learn how commercial ownership fits into your portfolio without taking on overwhelming risk. It also lets you practice managing more tenants and different kinds of tenants before jumping in headfirst. If it turns out that you’re struggling to figure it out, or that type of property doesn’t fit your strategy, the setback is much more manageable.
2. Invest Alongside Others
One great way to learn how to invest in different property types? Investing in someone else’s deal. Syndications and partnerships give you a front-row seat to how more experienced investors structure and manage projects.
You’re not just diversifying your portfolio – you’re gaining insight from investors who have already made mistakes, learned the lessons, and adjusted their strategies.
3. Take Courses
Commercial real estate comes with a steep learning curve. Free resources abound, but serious investors often consider advanced training like the CCIM (Certified Commercial Investment Member) program.
The CCIM course covers everything from underwriting to deal structure. It’s a time and financial commitment, but the knowledge you gain is well worth it if you want to grow into larger deals. And, contrary to what you might think, it’s not only for agents.
4. Get Creative with Financing
Commercial financing isn’t always straightforward. Banks often hesitate to lend if a tenant’s lease is near expiration, even if renewal looks likely. This is even more true if you have a one- or two-tenant commercial property, or if the tenant near expiration is a large portion of your income stream (like an anchor store in a strip mall).
That’s where creativity comes in. Seller financing, second liens, or working with the property’s existing lender can help make the deal work. Flexibility on terms and financing source is often what separates successful investors from those who can’t get the financing done.
5. Diversify to Reduce Risk
Let’s say you buy a 20,000 SF industrial building with a single tenant. When their lease is up in 10 months, they decide not to renew. Now you’re left with 100% vacancy for a property type you’re unfamiliar with.
Now imagine if that 20,000 SF industrial building was split into 3 units. When one leaves, your vacancy is only at 33%, and you’ve got much more stable footing while you find a new tenant.
Whenever possible, start with multi-tenant properties. They spread the risk and keep income more stable, especially as you’re building your portfolio.
6. Refinance When Leases Are Fresh
Leases are the lifeblood of commercial real estate. Banks place a higher value on properties with strong, long-term tenants in place, and are likely to give you better financing.
If you buy a commercial property and negotiate fresh leases with every tenant, that’s the perfect time to approach your lender. A refinance at this stage may even allow a cash-out option, freeing up capital to reinvest in new deals.
Final Thoughts
If you’re looking to start investing in commercial real estate, it doesn’t require blind faith and a shot in the dark – it’s about taking strategic, measured steps. Start small, learn from others, stay educated, and be strategic with your financing and deal structures to help reduce your risk while setting you up for growth.
Many investors we work with appreciate having a clear path forward and experienced guidance along the way. If you’re ready to move from residential into commercial real estate, contact us to discuss the best strategies for building your portfolio.
