Investors looking for an alternative to the stock and bond market might consider real estate as a viable investment vehicle. After all, real estate is historically one of the most safe, yet lucrative investments a person can make. Even smart investors make money during a down real estate market.

The question is what type of real estate to invest. There are two primary types of real estate, residential and commercial. The former is frequently associated with “flipping”, that is, buying a residential property, rehabilitating said property and selling it for a profit. Residential real estate investing also includes buying single-family properties and renting them on a short or long-term basis.

Commercial real estate investment is the purchase of unimproved land, retail facilities, institutional facilities and other commercial sites such as banks and office complexes.

Basics of Commercial Real Estate

Commercial real estate differs in both use and zoning. While some commercial real estate is used for residential purposes, almost no residential real estate may be used for commercial purposes. Commercial real estate is reserved to certain uses, determined by the local governing authority. It may be used as a retail establishment or for institutional use, such as an assisted living facility or hospital.

The designated use is usually strictly enforced and conversion to another use is typically very costly, if not impossible. Any commercial real estate investor should be aware of city, county and other government zoning laws.

Investing in Commercial Real Estate

Like with any other type of for-profit venture, there are considerations to be taken when investing in commercial properties.

Invest wisely and with patience. One of the largest pitfalls in purchasing commercial property is not allowing it to be profitable. While projections will be a strong indicator of future earnings, there is no guarantee. Purchasing multiple properties only to find a few actually make money will defeat the purpose.

Be willing to sell. Property owners can loose a significant amount of money when fighting the inevitable. Buildings will age. That translates directly into roof repairs/replacement, plumbing replacement, electrical wiring replacement, parking lot rehabilitation and other costly upkeeps. Holding onto a property too long means being responsible for a big price tag.

Don’t diversify too quickly. In the world of stocks and mutual funds, diversification is the name of the game. It helps not only to improve gains but minimize risk. In the world of commercial real estate, this is simply not true–at least, for new investors. Different property types have different needs and on-the-job learning is not a viable strategy to make money in commercial property investment.

Be aware of environmental impact. Any architect will tell a commercial investor if a property doesn’t pass an environmental impact study, it simply isn’t worth the money. Environmental regulations might turn what appears to be a good investment into a money-pit nightmare.

There are more considerations when buying commercial real estate. After the transaction, will you be the landlord collecting rents or will you hire a property management service? What type of leases will you offer? Triple N lease, gross lease or modified net lease? The answer is to hire a licensed real estate broker. An experienced brokerage firm won’t make the mistake of letting you make a costly mistake.