Commercial real estate is property that is used for business purposes or as a workspace. Meaning, it is utilized professionally, instead of for housing.
While there is a prolific amount of real estate constructed, it is an investment area that we usually aren’t taught about. This can make it can seem complicated, but it doesn’t have to be.
In this blog, we’ll walk you through everything you need to know about commercial real estate, including 11 types of commercial real estate you could be exploring.
Commercial Real Estate Investing vs. Residential
Most real estate investors are drawn to real estate because it is a source of passive income. In a residential context, you might buy real estate in the form of apartment buildings or single family homes and rent these units out to tenants. In this way, you can earn predictable rental income.
This is an easy way for real estate investors to earn a source of passive income, because inflation typically causes real estate to appreciate over long periods of time, regardless of whether rents increase from year to year.
The concept is exactly the same with commercial real estate. The only difference is that with commercial real estate, tenants rent space from you for commercial (business) purposes, instead of to live in it.
Typically, commercial real estate is often broken down into 4 broad categories, which are:
- Apartments
- Industrial space
- Retail space
- Office space
The reason that apartments—and also mobile home parks and other “multi-family” properties over 4 units—are considered to be commercial properties is because they are run, at scale, as a business. Meaning, the units within these buildings are operated together, with the profits flowing through to the owner on a Profit & Loss (P&L) statement.
Of course, those four categories can be further broken down into the 11 types of commercial real estate described below.
11 Types of Commercial Real Estate
There are at least 11 key types of commercial real estate that you should know about. Each type has its own unique benefits as well as associated risks and costs.
1. Apartments (Multi-Family Properties Over 4 Units)
Aparement and other multi-family properties over 4 units are considered by lenders to be commercial real estate. These properties can be a great real estate investment because human beings will also need safe places to live.
And, if you do a good job of getting reliable renters, you can count on your rental income to be relatively stable from year to year.
2. Manufactured Home Communities (MHCs)
Manufactured home communities (MHCs) are a temporary or permanent areas where manufactured homes and travel trailers can congregate. The advantage of these communities are that they can provide affordable, low cost housing to residents.
While the term “mobile home” is often used interchangeably with “manufactured home,” manufactured homes adhere to strict guidelines set by HUD, ensuring a uniform level of quality, safety, and energy efficiency. These homes are typically transported to a site in one or more sections, where they are assembled.
When you invest in a manufactured home community, you lease the land and utility access connections that you own to home owners. In some cases, you might own a few of the homes situated within the community and rent them out to tenants. One thing to keep in mind is that manufactured homes tend to depreciate faster than other types real estate, so this approach does require some extra work.
On the upside, the land you own will usually appreciate over time and the value of your manufactured home park is priced based on the net operating income (NOI) that it generates, not on the value of the park-owned homes.
3. Industrial or Distribution Centers
Industrial real estate is used for the distribution of products. If you invest in industrial real estate, you can lease your property to a business or businesses that have a need for this type of real estate.
This type of real estate investments can be ideal if there’s a lot of truck traffic in your area on it’s near an airport.
4. Land Investing
Land real estate involves investing in real estate that does not have a building on it.
For example, you might buy land and then sell it to someone who wants to build a house. You could also sell it to a developer who wants it for construction purposes or to build a new development.
Land can also be purchased for its timber value, mineral value, or to be rented out for farming purposes.
5. Office Space
Office space is a building that provide a suitable environment for office operations and related business purposes.
You can buy office space and then lease it to other businesses. Office real estate typically produces stable income, because it is priced by the square foot and usually involves long leases, often three to five years or longer.
6. Retail Space
Retail real estate is used for shopping or other types of commercial purposes. You could buy retail real estate and then lease it out to businesses that want to set up shop in your area.
This type of real estate investment can be very lucrative, but also carries high risks because retail real estate depends on foot traffic.
7. Storage Facilities
If you buy real estate in this category, you can lease it to businesses or individuals who need to store items.
Self-storage businesses can offer either temperature or non-temperature controlled units for rent, as well as other types of long and short-term storage.
8. Vehicle Storage
You could buy real estate in this category to lease out to businesses or individuals who need secure storage space for vehicles.
Commonly, vehicle storage investors set up safe storage spaces for cars, work trucks, boats, recreational vehicles (RVs), and other types of vehicles that wouldn’t typically be stored at a person’s home.
In exchange, these real estate investors receive monthly rent from their storage clients.
9. Parking Lots and Garages
You could buy real estate in this category and then lease it out to businesses or individuals who need long or short-term parking spaces. This is ideal for real estate investors who live in urban locations, where parking spaces are limited.
10. Hotel / Hospitality / AirBnB
Hotel real estate is real estate used for the purposes of lodging or entertainment. This real estate type includes hotels, resorts, and inns.
It also includes AirBnB rentals, because as short-term rentals offering a furnished space, they are also a hospitality business.
11. Special Purpose
This is a bit of a catch-all for other types of commercial real estate. It can include things like airports, cemeteries and rental car facilities, where land is monetized in a less common or creative way. These types of real estate investments are better suited for experienced investors.
While there is more risk involved with this type of real estate, there can be high returns if you do it right.
The Right Commercial Real Estate Investment?
When choosing a real estate investment, think about your personal experience, the amount of time you have available to invest in real estate, your down payment, your skill-set, and your risk tolerance.
And, of course, keep in mind that real estate is not an easy way to get rich quick. However, as the old saying goes, the best investment on earth is…earth.
Why is that? Well, no one is making more of it.