Real estate is always an investment. But for the first time homebuyer searching for their dream home, a solid return of investment is probably not at the forefront of their decision making. In commercial real estate, we rarely have such sentimental distractions. That’s not to say emotions aren’t heavily involved in commercial property investment. But a question that never seems to fall out of fashion for those visiting JohnHartCRE is: “What type of commercial real estate is the most profitable?” The answer is more nuanced than a blog could hope to summarize. But we’ll do our best with this admittedly general response. However, if you’re really curious about the best investment for your specific situation, we recommend setting up a talk with one of our talented commercial real estate agents!
Research is Essential for Sage Commercial Property Investment
Whether you’re starting out with your first commercial investment or bolstering your portfolio, you’ll need to do some serious research. Sure, there are types of commercial property that are generally more profitable no matter where you go. But different regions of the country can influence the profitability of various types of commercial real estate. So, you can never discount the power of some well-conducted research.
Are You Committed to Your Commercial Property Investment?
Once you narrow down the type of commercial property that best suits your interests, you’ll need to make sure you have the time and attention to devote to its success. Very few commercial investments offer a simple “get it and forget it” approach. They require effort on your part to generate a solid return of investment (ROI). But careful research into the different commercial real estate types can help you determine which will be most likely to yield a strong ROI. And unlike residential real estate where charm and comfort often dilute interests in ROI, your commercial property’s ROI should always be central in your decision making.
The Types of Commercial Property That Offer the Highest ROI
In most cases, the types of commercial real estate that are the most profitable are:
- Strip malls and multi-tenant retail spaces
- Multifamily properties
- Triple net lease properties
In California, strip malls offer some of the most lucrative commercial property types you’re likely to find. This adheres to the idea of investing in areas of high growth. That’s because strip malls have built-in foot traffic; a beacon for long-term tenants. And even should one of your tenants have to leave as a result of insufficient income, you can likely rest assured that location is not the issue. Because of this, you should have no problem finding a new tenant quickly.
Of course, not all strip malls are created equal. Therefore, you’ll have to be just as vigilant in your research as you would with any commercial property. Since location is so fundamental to a successful strip mall, pay careful attention to the facility’s location. Ideally, you’ll want a space with optimal visibility and ample parking. Rapidly developing suburban areas make the perfect launchpads for successful strip malls. But any area offering plenty of growth should be worth your consideration.
Multifamily Rental Properties
You’ll also find plenty of Californians dependent on rental options; especially in the larger cities. The higher the number of tenants you can reasonably accommodate, the better. This opens up a multitude of commercial property options for you. The mind obviously jumps to apartment complexes, but don’t discount other multi-tenant properties like office buildings, trailer parks, student housing… even storage facilities. The more tenants, the greater your ROI.
But a commercial property with several tenants isn’t an instant recipe for high ROI. You’ll still need to do your research. Ultimately, it’s best to consider properties with a solid track record of reliable long-term tenants, comprehensive maintenance records, and impressive amenities. This is because you’ll want to keep current tenants happy and easily attract new tenants when necessary.
Triple Net Lease Properties
However, if you’re savvy enough, there is a way to secure a high ROI with just a single tenant. We’re referring to a triple net lease agreement (sometimes known as an NNN or net-net-net lease). These contracts put the responsibility on the tenant to not only pay the rent but added expenses that could come up including taxes, insurance, maintenance, and even utilities. While you’d be hard-pressed to find apartment complexes with triple net leases, they’re used somewhat frequently in retail spaces and commercial properties of an industrial nature. The reason these commercial property types are more prone to including a triple net lease is because of their highly operational nature.
However, inexperienced investors may struggle to find takers on a triple net lease in certain markets. This is why it’s integral to research your commercial property prior to committing to an investment. If you’re set on a triple net lease, make sure you’re attaching it to a more recently constructed or updated building with infrequent vacancies. Otherwise, your triple net lease likely won’t hold much weight.
The Power of the Right Condominium
While these are generally the type of commercial property investments that yield high ROIs, an artful investor can turn a significant profit with a single well-researched condominium. In this case, location isn’t everything, but it may as well be. Because a beachfront condo is going to be significantly easier to market and rent out than one in the middle of a high crime area far away from any tourist hotspots.
So, you can invest in a burgeoning strip mall or a single condo and see some serious ROI. But the bottom line is that you’ll need to do your research. And that includes talking with professionals, like our agents at JohnHartCRE. If you don’t know where to begin or you’ve simply hit the limits of your research, give one of our commercial real estate agents a call!