Proven Investment Strategies For Commercial Real Estate
by Ankita Tripathy Real Estate 10 December 2023
Investing in commercial real estate can diversify an investor’s portfolio. However, choosing the right strategy depends on one’s unique situation and goals.
Value-added strategies focus on adding value to a property over time to achieve outsized returns upon sale. They are at higher risk than core investments but offer higher return potential.
Buy & Hold
The buy-and-hold investment property strategy that professionals at Caliber teach focuses on generating cash flow. This means that investors look to buy properties that generate enough income to cover expenses, including mortgage payments. Rental income also helps to pay down the principal on a loan, which reduces the amount of interest charged over time. With this approach, investors can build long-term wealth through passive income generated by their investment properties.
Some investor types take an active role in managing their buy-and-hold rentals, such as property managers or commercial leasing teams. This may involve a higher level of management involvement, but it can improve long-term results and increase rents for investors over the life of the property.
Other investors focus on value-added investments that add functionality, attract tenants, and drive property appreciation. These investments often require significant renovations that can be expensive but will yield outsized returns upon disposition. These investments are typically considered riskier and fall into core, core-plus, or value-added real estate. Depending on your risk tolerance, one of these strategies may be more appropriate for your investing goals.
Buy & Rehab
The buy rehab rent refinance repeat (BRRR) real estate investing strategy is an excellent way to build a profitable portfolio. With this strategy, you purchase a distressed property and renovate it to increase value and create a tenant-ready space. Once the property is remodeled and stabilized, you can refinance it and extract equity for future investments.
Another popular real estate investment strategy is buy-and-hold rentals. With this strategy, investors acquire rental properties and then hold them for a long period to force appreciation and achieve substantial capital gains. This strategy can be difficult to execute because rental properties are typically purchased at retail prices and do not cash flow well.
Investors can also use the owner-occupied buy-and-hold strategy to generate cash flow by operating a business in the building and leasing the remaining space to other tenants. This requires a business-first mindset to align the needs of your business with your real estate investment goals. – says Jasen Edwards, chair of the Agent Editor Board at Agent Advice.
Buy & Rent
Commercial real estate offers investors the best opportunity to see immediate profit from rental income and loan amortization. These investments also have a low or negative correlation with broader financial markets, making them a great diversifier for other investment portfolios.
However, this is a labor-intensive strategy that requires significant hands-on management. It can also be risky in uncertain economic conditions, as there is no guarantee that businesses will remain in operation and will continue to pay rent in the future.
Those who prefer less work and greater cash flow can pursue the buy-and-hold rental strategy, which involves acquiring property that can be leased to business tenants long-term. Investors can improve the profitability of their holdings by implementing value-added renovations that increase rents, decrease expenses, or force appreciation. This is a common strategy in residential real estate, but it can be equally successful with CRE. A popular variation on this strategy is the BRRRR method, which stands for buy, rehab, rent, refinance, repeat.
Buy & Refinance
Buy-and-hold commercial real estate strategies are a solid way to generate a steady income stream and build long-term wealth. These strategies are best for investors with a higher tolerance for risk and a longer investment time horizon.
For example, the BRRRR investing strategy (Buy, Remodel, Rent, Refinance, Repeat) is a great choice for newbie investors since it allows them to gain hands-on experience and build a rental portfolio without spending all their cash upfront. Using this method, investors purchase a property at or below market value, fix it up, and rent it out for long-term returns.
Core investments are:
- Typically, high-quality office buildings.
- Retail centers.
- Industrial properties.
- Multifamily apartment complexes with low leverage and good underlying fundamentals.
Core investors seek stable income and capital preservation with a short to medium-term time horizon.