How To Get Started in Commercial Real Estate Investing

Investing in real estate is one of the most powerful ways to build long-term wealth, and commercial real estate offers some of the most lucrative opportunities in the industry. With the potential for higher income streams, long-term appreciation, and portfolio diversification, it is no surprise that seasoned investors look to commercial properties to enhance their wealth strategy.

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Understanding the fundamentals is essential if you’ve spent years investing in residential real estate and are now considering investing in commercial assets. This guide will explain everything you need to know to invest in commercial real estate confidently.

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What Qualifies as Commercial Real Estate (CRE)?

CRE refers to properties primarily used for business operations rather than residential living. These properties generate income by leasing space to businesses, institutions, or organizations, rather than to individuals or families. Unlike residential real estate, where investors typically collect rent from long-term tenants, commercial real estate investors lease space to companies that use it for offices, retail, manufacturing, or other business functions.

Additionally, raw land designated for future commercial development falls under the umbrella of commercial real estate. Whether it’s a high-rise office building, a medical facility, or an industrial warehouse, CRE encompasses a wide range of property types, each with its own unique investment potential.

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The Five Major Types of CRE

Understanding the various types of commercial properties is crucial before exploring investment strategies. Each asset class has unique characteristics, risk factors, and potential for income. Here’s a breakdown of the five main categories of commercial real estate:

1. Office
2. Retail
3. Industrial
4. Multifamily
5. Special purpose

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1. Office Properties

Office buildings are among the most common types of commercial real estate, serving as the foundation for businesses of all sizes. These properties range from single-tenant offices to massive skyscrapers in major cities. Office buildings are typically classified into three categories: Class A, Class B, and Class C: 

• Class A properties are the highest quality, featuring modern construction, prime locations, and high-end amenities. They attract top-tier tenants but have premium price tags. 
• Class B buildings are often older structures that require some renovation. However, they offer solid investment potential, especially for those looking to improve and reposition them. 
• On the other hand, Class C buildings often need extensive repairs. They are located in less desirable areas, making them riskier but potentially lucrative for investors willing to undertake redevelopment projects. 

The shift to remote and hybrid work has impacted office demand, leading to an increase in flexible workspaces and co-working environments. However, medical office buildings (MOBs) stand out as a resilient investment option in the office sector, offering long-term growth potential and consistent demand from healthcare providers.

Furthermore, due to the rising demand for pet healthcare services, veterinary properties have become an increasingly attractive asset class. The pet industry has experienced significant growth, with an increasing number of people treating their pets as family members and investing in high-quality veterinary care. This demand has led to stable, long-term leases for veterinary tenants, making these properties a recession-resistant investment.

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Retail Properties

Retail real estate includes properties where goods and services are sold directly to consumers. These spaces range from small standalone storefronts to expansive shopping malls. The retail sector has undergone a significant shift due to e-commerce, prompting many traditional retailers to adapt by integrating online sales with their brick-and-mortar locations. 

Despite this transformation, retail spaces continue to be essential to commercial real estate. Common retail properties include strip malls, shopping centers, banks, restaurants, and big-box retailers like Walmart or Target. Prime retail locations, particularly those in high-traffic areas, continue to attract strong tenant demand. However, investors must carefully assess location, consumer trends, and tenant stability when considering retail properties.

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Industrial Properties

Industrial real estate has seen unprecedented growth in recent years, driven by the expansion of e-commerce and global supply chains. These properties are primarily used for warehousing, manufacturing, and distribution. 

Industrial properties include warehouses, logistics centers, research and development (R&D) facilities, and flex spaces that combine office and industrial functions. The demand for industrial real estate has surged due to the need for more efficient supply chain management and last-mile delivery solutions. 

These properties often have long-term leases and relatively low maintenance requirements, making them attractive investments. Additionally, the rise of automation and smart warehouses is further shaping the future of industrial real estate, providing new opportunities for investors.

Learn more about industrial real estate investing by reading our blog, “Things To Know About Investing in Industrial Real Estate.”

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Multifamily Properties

Multifamily real estate consists of residential properties with multiple rental units, typically classified as commercial when they contain five or more units. This includes apartment complexes, high-rise condominiums, student housing, and senior living communities. 

Multifamily properties are a popular entry point for residential investors transitioning into commercial real estate because they offer stable cash flow and consistent demand. Unlike office or retail leases, which can span several years, multifamily leases are usually shorter-term, meaning property owners must account for tenant turnover. However, with rising homeownership costs and an increasing demand for rental housing, multifamily properties remain a resilient and profitable investment.

Our blog, “How To Value and Evaluate a Multifamily Property for Investment,” will give you valuable insight into properly evaluating multifamily properties. 

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Special Purpose Properties

Some commercial properties are designed for particular uses, making them difficult to repurpose. These special-purpose properties include hotels, resorts, car washes, gas stations, self-storage facilities, amusement parks, and sports stadiums. 

Because these properties cater to niche markets, they require specialized knowledge and management expertise. For example, hotels depend on fluctuating occupancy rates and seasonal demand, making them riskier but potentially high-reward investments. 

On the other hand, self-storage facilities have gained popularity due to increasing consumer demand for storage space. Investors considering special-purpose properties must thoroughly research market conditions and operational requirements before making a purchase.

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How To Invest in Commercial Real Estate

Investing in commercial property is one of the most effective ways to build long-term wealth. Still, success in this sector requires careful planning, deep market knowledge, and strategic decision-making. Unlike residential real estate, where deals are often more straightforward, commercial properties involve complex financial models, extended lease structures, and varying market dynamics that depend on the asset class and location. Following a structured approach is crucial whether you’re a first-time investor or transitioning from residential real estate.

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Understanding How Commercial Real Estate Differs from Residential

One of the most fundamental steps in commercial real estate investing is understanding how it differs from residential real estate. The primary distinction lies in how properties are valued and generate income. Residential properties are typically valued based on comparable sales of homes in the area. In contrast, commercial properties are primarily valued based on income potential, measured through net operating income (NOI) and capitalization rates (cap rates).

Another key difference is lease structures. Residential leases are typically short-term, often lasting 12 months, while commercial leases can range from three to ten years or more. Longer lease terms provide more stability and predictable cash flow for investors. Additionally, many commercial tenants operate under triple-net (NNN) leases, which cover property expenses such as taxes, insurance, and maintenance, significantly reducing costs for property owners.

Tenant type and demand also play a significant role. A commercial property’s success is heavily influenced by its business sector. For example, an office building’s occupancy rate may depend on corporate leasing trends, whereas industrial warehouses thrive due to the rise of e-commerce. Understanding how location and tenant demand intersect is critical in making informed investment decisions.

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Conducting Market Research and Analyzing Comparables

Thorough market research is essential before purchasing any commercial property. Investors must evaluate local economic conditions, job growth, population trends, and demand for different commercial property types.

A crucial part of market research is analyzing comparables, or comps, which are recently sold commercial properties that share similarities in location, size, tenant type, and income generation. Examining comps allows investors to estimate a property’s fair market value and understand rental rate trends.

When analyzing comps, consider:

• Location: A prime location can lead to higher rental income and lower vacancy rates.
• Property size and condition: Ensure comparable properties have similar square footage and overall condition.
• Tenant strength and lease terms: Long-term leases with creditworthy tenants increase the property’s stability.

Additionally, researching upcoming developments is crucial. A new infrastructure project or business expansion nearby can increase property values, while oversupply in the market could lead to higher vacancy rates and downward pressure on rents.

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Using the Right Financial Metrics for Investment Analysis

To make informed investment decisions, understanding key financial metrics is essential. Here are three of the most critical formulas every commercial real estate investor should know:

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NOI

NOI = Total Revenue – Operating Expenses
This calculation represents a property's net income, which is the amount remaining after deducting operating costs but before taxes and financing expenses. A higher NOI indicates a more profitable investment.

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Capitalization Rate (Cap Rate)

Cap Rate = NOI / Property Value
Cap rates measure a property’s return on investment relative to its price. Higher cap rates suggest higher returns but often come with greater risk.

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Cash-on-Cash Return

Cash-on-Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested
This metric is crucial for investors using financing, as it measures the actual return on the cash invested compared to the loan amount.

Mastering these financial metrics allows investors to compare deals and assess risk-adjusted returns.

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Building a Financial Cushion With Cost Contingencies

Commercial real estate investments often come with unexpected expenses, so setting aside cost contingencies is essential. Investors should allocate funds to cover the following:

• Early vacancies: If tenants leave before their lease expires, you need funds to cover lost rent.
• Renovations and improvements: Upgrading a property can attract better tenants and increase rental rates.
• Legal and administrative fees: These may include zoning approvals, environmental studies, and property management fees.

A typical cost contingency budget ranges from 5% to 15% of the total investment. Additionally, many investors set aside a capital reserves fund to cover long-term maintenance costs, ensuring cash flow stability even in challenging market conditions.

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Common Commercial Real Estate Investing Mistakes to Avoid.

Avoiding costly mistakes is just as important as following best practices. Here are some of the most common pitfalls investors should steer clear of:

• Improper valuations: Each commercial property is unique, and failing to account for location, tenant mix, and market trends can lead to overpaying or investing in an underperforming asset. Always perform thorough due diligence before making a purchase.
• Lack of financial knowledge: Commercial real estate financing is more complex than residential loans. Investors must understand key terms such as loan-to-value (LTV) ratios, debt service coverage ratios (DSCR), and commercial mortgage-backed securities (CMBS). Partnering with an experienced commercial real estate lender or financial advisor can prevent costly mistakes.
• Ignoring market cycles: Like all investments, commercial real estate is subject to market fluctuations, commonly referred to as market cycles. Investing at the wrong time, such as during an overheated market, can result in low returns or financial losses when prices correct. Stay informed about economic trends, interest rates, and local market dynamics.
• Neglecting due diligence: A commercial real estate purchase requires detailed analysis, including tenant lease reviews, property inspections, environmental assessments, and title searches. Rushing into a deal without proper vetting can lead to hidden liabilities and unexpected costs.
• Not working with a professional team: Many new investors try to handle everything themselves, but commercial real estate is a team sport. Working with brokers, attorneys, lenders, property managers, and financial analysts can enhance decision-making and reduce risks.

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Exclusive Commercial Real Estate Investments With the Right Partner

Commercial real estate is one of the most powerful vehicles for creating long-term wealth. With the right strategy, it offers consistent income, portfolio diversification, and the kind of appreciation that outpaces traditional investments.

Over the past 30 years, I have invested in and managed billions of dollars in commercial assets, including medical office, multifamily, retail, industrial, and veterinary properties, each carefully selected for its performance and resilience.

I don’t just talk about commercial real estate — I live it.

If you’re ready to move beyond theory and start investing in exclusive, off-market deals alongside an experienced partner, let’s connect.