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Fundamentals of investing in commercial real estate

There are fantastic commercial real estate opportunities just waiting to be explored in Watsonville, CA. The city’s strong local economy and thriving industries make it an ideal location.

A successful commercial real estate investment starts with the right preparation. Read on to learn the fundamentals of investing in commercial real estate.

Ways to invest in commercial real estate

Direct investment and indirect investment are the two main ways to invest in commercial real estate. Keep your financial goals in mind to pinpoint the best mode of investment for you. 

Direct investment involves buying the property outright and taking care of its management. Direct investment opportunities include:

  • Renting out the property for long-term income
  • Developing the property and selling it for a profit

This option is riskier but yields a higher return. Direct investments are ideal for those who have a lot of capital and industry expertise.

Indirect investment, as the name suggests, is a much more hands-off option. This investment can be done through Real Estate Investment Trusts (REITs), exchange funds, and the like. This is best for investors who want to diversify their assets without going through a typical real estate transaction. 

Types of commercial properties

One great thing about investing in commercial real estate is the diversity of your property options. Here are the different types of commercial properties:

  • Office – Properties used for office buildings or company headquarters. Urban office buildings include high-rises and skyscrapers while suburban office buildings are typically found in mid-rises and office parks.
  • Retail – This type covers a range of establishments from strip malls to restaurants. These properties are usually split among several tenants in one space.
  • Multifamily – Classified as residential rental properties. An investor can buy homes for sale in Watsonville, CA, for instance, and turn them into rental units to generate income.
  • Industrial – Can be a heavy manufacturing facility, a light assembly area, or a warehouse. The size and location depend on the use.

Each option offers you advantages and disadvantages. Discuss your situation and objectives with your realtor to better determine the right fit for you.

Commercial real estate classes

In addition to the different types of properties, commercial real estate is also divided by class, as follows:

  • Class A – Represents the highest quality buildings in the market and area. These are properties that were built within the last 15 years. They boast top amenities and high-income tenants. Buildings are usually professionally managed and demand the highest rent. There are seldom any maintenance issues.
  • Class B – A step down from Class A, these are often older properties with typically lower income tenants. They often aren’t professionally managed. Expect lower rental income than you might expect from Class A. While these buildings are well-maintained, some repairs and maintenance issues would be inevitable.
  • Class C – These are older properties, typically 20 years old or more that need constant maintenance and are found in a less desirable location. These properties often need to be renovated to update the building infrastructure. As a result, they tend to have the lowest rental rates in the market.

To get the most out of your investment in commercial real estate, work with the best real estate agent in town. Amber Melenudo is the top producing agent in Santa Cruz County. Get in touch with me today by calling 831.661.5591. You can also send an email to amber(at)davidlyng(dotted)com.