Investing in commercial real estate is an excellent way to build wealth and secure your financial future. It is never too late to start investing, but it requires a nuanced understanding of the market and how it works. 

In this article, we discuss five things you should know when investing in commercial real estate. These insights can significantly influence your decision-making process and the potential success of your investment. And, don’t forget, our team of seasoned professionals are eager to assist you in any way they can. If you have additional questions, please feel free to contact us: 385-248-0613

  1. The Impact of Lease Term Length on Property Value

The duration of the lease term remaining on an investment property is a pivotal factor in determining its value. A property with a long-term lease in place is generally seen as more stable and less risky, which can elevate its market value. Conversely, properties nearing the end of their lease terms may be perceived as riskier, potentially leading to a lower valuation.

You should assess the remaining lease term as part of your due diligence. A longer lease term can provide a predictable income stream and can be particularly appealing if the tenant is reliable and financially stable. However, shorter lease terms might offer flexibility to renegotiate terms or repurpose the property, which could be advantageous in a rapidly evolving market.

  1. Personal Guarantee vs. Corporate Guarantee

Understanding the distinctions between personal and corporate guarantees is crucial in commercial real estate investments. A personal guarantee means that an individual is personally liable for the lease or loan, providing an additional layer of security for the lender or owner. In contrast, a corporate guarantee ties the liability to the company itself, not to any individual.

You need to comprehend the implications of these guarantees on their risk exposure and financial obligations. A personal guarantee can offer more security but may also entail more rigorous scrutiny of the guarantor’s financial background. A corporate guarantee, while less personal, relies heavily on the financial health and reputation of the company. Questions on this? Schedule a call with our team here.

  1. The Rise of Fractional Ownership

Fractional ownership is wildly transforming the landscape of commercial real estate investments. Fractional ownership through tenancy in common is our specialty. It allows investors to own a piece of premium properties without the need for significant capital, broadening access to high-quality investments that might have been out of reach previously. This model pools resources from multiple investors, enabling them to share the risks and rewards.

This democratization of investment means more opportunities but also necessitates a thorough understanding of how fractional ownership works, including management, profit distribution, and exit strategies. It’s an exciting avenue for investors to diversify their portfolios and tap into premium markets with lower financial barriers. Check out our tenant-in-common properties here. 

  1. The Importance of Location and Anchor Tenants

Being in the path of growth is a key consideration in commercial real estate. Properties situated in developing areas or near major economic drivers like shopping centers, universities, or hospitals tend to appreciate in value. An anchor tenant, such as a well-known retailer like Target or Costco, can significantly enhance the property’s appeal, drawing in more foot traffic and potentially increasing the value of the investment.

You should definitely research the area’s economic trends, future development plans, and the presence of anchor tenants when evaluating potential investments. These factors can indicate the property’s potential for appreciation and its resilience to market fluctuations.

  1. Understanding Different Lease Structures

Not all commercial leases are created equal. The distinction between double net (NN) and triple net (NNN) leases is particularly significant. In a double net lease, the tenant is responsible for property taxes and insurance premiums, while the landlord covers maintenance costs. In a triple net lease, the tenant assumes responsibility for taxes, insurance, and maintenance, offering a more hands-off investment for the landlord. We love NNN leases here at Millcreek Commercial—and have a portfolio full of them ready for your investment. Passive income, here you come!

Understanding these lease structures is vital for assessing the property’s financial outlook. Triple net leases can appear more attractive due to the lower management burden on the owner, but the overall value and appeal of the deal depend on the specific terms and the property’s context. Carefully analyze the lease agreements to gauge their potential impact on the investment’s profitability and management requirements.

Conclusion

Investing in commercial real estate offers vast opportunities but comes with its unique set of challenges and nuances. By understanding these five key aspects—lease term length, guarantee types, fractional ownership, location and anchor tenants, and lease structures—you can make more informed decisions. Thorough research, due diligence, and a strategic approach are indispensable in navigating the complexities of commercial real estate investment and maximizing its potential rewards. And again, if you have any questions regarding the investment process or the commercial real estate landscape, don’t hesitate to give us a call.

Schedule an introductory meeting here.