Commercial real estate is a complex field. And that’s what makes it so intimidating to people who are curious about how it works and why investing in this sector is more lucrative.
For one, revenue from commercial real estate comes from tenants. Unlike residential properties in which your income sources are limited, commercial properties let you generate income from the multiple units you have in your portfolio. So, when you have a 50-unit apartment complex in your portfolio and 10 of these units are vacant, you still have 40 that produces cash flow.
But like most markets, commercial real estate goes through a cycle of boom and busts influenced by market players, from property developers down to the renters themselves.
This is how the commercial real estate cycle looks like as taken from a Medium.com article :
Phase I is called the “recovery phase” since it’s the point where the market starts to gain ground after a recession. There is a high inventory of distressed properties for investors to purchase and revitalize.
As vacancies decline, Phase II is triggered. New constructions begin to pick up along with demand and rent growth.
Phase III opens with new inventory flooding the market and contributing to what is known as hyper-supply where interest rates increase.
This culminates in a big crunch that results in a wave of distressed properties before the market restarts with Phase I.
Investors will only have to be creative and intuitive in this market in order to keep themselves from feeling the brunt of a recession. Often, the best strategy is to invest in the right type of apartment building and applying value-add strategies to an asset.
CLASS SYSTEM OF RATING APARTMENT BUILDINGS
Let’s start by knowing the rating system investors should use when adding to their portfolios.
In commercial property investing, you will need to know what categories you should focus on:
Look along the lines of posh, upscale properties that are located in high-income communities. These are your luxury assets that only a small segment of the market can afford.
Low to low middle-income tenants are the prime markets for Class C apartments that usually have very low rent. These properties are ideal for people who prioritize affordability more than the lifestyle being offered.
These are catered towards upper middle-class tenants that mostly include professionals. The average age of Class B properties is 15 years old, although there are some that can reach up to 25.
Apartments with this classification are usually government subsidized and are also referred to as a form of social housing.
ADDING VALUE TO APARTMENTS
To maintain a strong net operating income from your apartment assets, you will need to increase its value by using these techniques:
If the property is distressed, you can revitalize it by making structural and aesthetic improvements. A new coat of paint, refurbished rooms, and decorations are often the best ways to go about it.
Leaky pipes and broken ceilings can take a toll on your investment property’s value, so make sure you do an inspection, look for problems and fix them right away.
3. Income-generating components
Adding a coin-operated laundry service and car parks can help you generate extra income on the side. At the same time, raise your property’s selling price later on.
4. New amenities
Are you catering to millennials or any specific demographic? Build amenities that are particular to the lifestyles of your niche, such as a fitness center, organic cafe, or a co-working space.