Useful tips on how to invest in commercial real estate

Are you wondering, how to invest in commercial real estate (CRE)? You’re probably seeking a steady income stream, good returns, and portfolio diversification. And, we are here to help you understand the world of CRE investments through this beginner’s guide. 

Investing in commercial real estate (CRE) is attractive due to its steady returns, passive income, and growth potential. However, keep in mind that not all commercial property investment opportunities are the same (or lucrative). Understanding when, where, and how to invest in CRE is crucial for success or failure. If you’ve been investing in residential real estate and now want to shift your interest toward commercial investments, this guide covers everything you need to know.

What constitutes commercial real estate?

Commercial real estate refers to properties leased out for business and retail purposes. These include office buildings, retail spaces, industrial sites, multifamily housing, and special-purpose properties such as schools and self-storage facilities. CRE investing also involves buying or developing properties intended for commercial tenants, with raw land for commercial use also included. 

People often pursue commercial real estate investment for future wealth, security, tax advantages, and diversification of their investment portfolios.

What are the main types of commercial real estate?

CRE encompasses various types of investments, each with its own characteristics and potential benefits.

Office space

This category includes office buildings ranging from single-tenant spaces to towering skyscrapers. They are classified into three categories: Class A, Class B, and Class C. Class A properties are typically modern structures in prime locations with top-notch amenities. These are managed by professional firms. Class B buildings are older but well-maintained, requiring some investment for upgrades. Class C properties are often targeted for redevelopment due to their poorer locations and infrastructure.

Retail properties

These include a wide range of establishments – from strip malls to large retail centers, banks, and restaurants. They are commonly found in urban areas and vary in size from 5,000 to 350,000 square feet.

Industrial buildings

This category includes warehouses and manufacturing facilities. They cater to industries requiring specific spatial requirements and docking facilities. Such industrial properties often present lucrative investment opportunities.

Multifamily housing

Multifamily properties consist of apartment complexes, condominiums, and smaller multifamily units. They are considered commercial if they contain more than four units. Interestingly, many residential investors transition into commercial real estate through multifamily properties.

Special-purpose properties

These properties are designed for specific uses. For example, self-storage facilities, and schools. This type of real estate is also prominent in the leisure and tourism industries. For example hotels, airports, sports stadiums, and amusement parks.

Mixed-use developments 

These are additional categories that combine various functions such as residential, retail, and public spaces within a single property. Today, such spaces are gaining popularity due to their versatility and ability to cater to diverse needs within a community.

What are the benefits of investing in commercial real estate? 

Investing in commercial properties can bring significant financial rewards. Here are some key advantages and unique opportunities of CRE investments. 

• Commercial real estate properties typically yield higher returns, averaging between six to twelve percent compared to one to four percent for single-family properties. 
• They also have lower vacancy risks and longer lease periods, resulting in more stable income streams.
• Commercial properties offer a steady cash flow due to longer lease agreements and multiple units. In some commercial leases, the tenants even cover taxes, insurance, and maintenance costs.
• CRE investment tends to have less competition due to perceived complexity. This offers opportunities for savvy commercial real estate investors.
• Commercial property management typically aligns with business hours. There’s usually less need for round-the-clock maintenance and tenant communication as compared to residential properties.

What are the risks associated with CRE investing?

Investing in CRE can offer substantial rewards, but like any investment, it comes with its share of risks. Navigating these risks requires careful due diligence, risk assessment, and risk management strategies for long-term investment success. 

• CRE values are subject to market fluctuations. Changes in interest rates, supply and demand dynamics, and local economic conditions can all impact CRE market performance.
• The financial health and stability of tenants can affect rental income and property occupancy rates. For instance, tenant bankruptcies, lease defaults, or long-term vacancies can lead to income loss and increased expenses for property owners. 
• Long-term leases provide stability but may lock in rental rates below market levels. Conversely, short-term leases offer flexibility but increase the risk of tenant turnover and vacancy. 
• The physical condition of the property can affect its value and income potential. Maintenance issues, capital expenditures, and unexpected repairs can increase operating expenses and reduce profitability. Moreover, environmental hazards, such as natural disasters, can also pose risks to property value and occupant safety.
• Rising interest rates can increase borrowing costs and reduce property affordability, especially during economic downturns.
• Changes in zoning laws, building codes, tax regulations, and government policies can impact CRE investments. Furthermore, legal disputes or litigation related to property ownership, leasing, or environmental issues can also create uncertainties and financial liabilities.
• CRE investments are generally less liquid than stock market or bonds. Selling commercial properties may take longer and involve higher transaction costs. 
• Effective property management is crucial for maximizing investment returns and maintaining property value. Inexperienced or ineffective management can lead to operational inefficiencies, tenant dissatisfaction, and decreased property performance. 
• Changes in capital markets, real estate investor sentiment, or capital allocation preferences can influence CRE investment pricing. 

How to invest in commercial real estate: Steps to consider

Understanding certain aspects before diving into commercial real estate investment can assist you in pinpointing lucrative opportunities and mitigating potential risks. You need to understand the following. 

• There is no shortcut to due diligence before investing. This includes reviewing financials, conducting property inspections, and understanding zoning regulations. If investing passively through REITs or funds, vet the company or manager carefully. You must research the local market and understand the supply and demand dynamics.
• Different property types perform differently based on location and demand. For example, currently, industrial properties are performing well, while retail spaces struggle due to online shopping.
• Investing in properties with multiple tenants, such as multi-family apartments, can lower risk.
• Real estate markets are influenced by economic factors. You must always make informed investment decisions and avoid buying at the peak or selling at the bottom.
• You need to plan for cost contingencies and set aside reserve funds for unexpected expenses. Especially, during renovations or leasing periods.
• Be prepared for setbacks and delays. Real estate projects often take longer than expected.

What is the best way to secure financing for your property investment?

Obtaining commercial real estate financing may seem daunting, but understanding the process and various loan options makes it achievable. 

• Decide whether to finance the property individually or as an entity. While most commercial real estate is financed by business entities, individual investors can also secure loans. Lenders assess borrowers’ financial track records to ensure loan repayment. They often require guarantees for newer businesses with no credit history.
• Recognize that commercial mortgages differ from residential ones. Commercial loans, ranging from five to 20 years, lack backing from government agencies such as Freddie Mac and Fannie Mae. 
• Lenders consider a property’s loan-to-value ratio (LTV), comparing the loan amount to the property’s value. Commercial loans typically have LTVs ranging from 65 to 80 percent, with lower ratios securing more favorable financing rates.
• The debt-service coverage ratio (DSCR) helps assess a property’s ability to cover debt. It compares annual net operating income to annual mortgage debt service. Lenders prefer DSCRs of at least 1.25 to ensure positive cash flow.

FAQs

How can I invest in commercial real estate without buying physical property? 

You can consider investing in commercial property real estate ETFs and mutual funds. These offer diversification at low costs. Another option is to pool your money into real estate companies or Real Estate Investment Trusts (REITs).  Alternatively, you can invest in commercial property real estate company shares or construction company shares. These potentially offer high returns but come with higher risks. 

What are some mistakes to avoid when investing in commercial real estate?

While commercial real estate investing can be lucrative, you must steer clear of certain mistakes. These include improper property valuations, neglecting due diligence, and not working with a competent team. 

Who should you hire before investing in real estate?

Hiring a team of professionals will streamline your CRE investments. These include a commercial real estate realtor with specialized training to help you with property research and negotiations. A real estate attorney will enable smooth transactions, protect your interests, and ensure legal compliance. You may also consider hiring an accountant to manage budgeting and tax statements. Another professional who will come in handy is a mortgage broker who can match you with suitable lenders and negotiate favorable terms. You will also require contractors to oversee the construction projects and property managers to handle tenant interactions, rent collection, and property maintenance.

Written by Ramona Sinha. June 15, 2025

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.