Commercial real estate (CRE) investors make money primarily in two ways: income from the property and profit from property appreciation. Let me break it down carefully:
1. Income from the Property (Cash Flow)
Investors earn regular income by leasing or renting out the property. Types of properties include office buildings, retail centers, warehouses, and apartment complexes. The income depends on the type of lease:
- Triple Net Lease (NNN): Tenant pays rent plus property taxes, insurance, and maintenance. Investors get mostly passive income.
- Gross Lease: Tenant pays a fixed rent; the investor covers expenses.
- Percentage Lease (common in retail): Tenant pays a base rent plus a percentage of sales.
Example:
An investor buys a small office building for $1,000,000. Tenants pay $10,000/month in rent. After expenses of $2,000/month, the investor nets $8,000/month or $96,000/year. That’s their cash flow.
2. Property Appreciation (Capital Gains)
Over time, properties often increase in value. Investors can sell the property later for more than they paid. Appreciation can happen due to:
- General market growth in the area.
- Upgrades or renovations to increase property value.
- Increased rental income, which raises the building’s market value.
Example:
Investor buys a warehouse for $500,000. After 5 years, the property is worth $700,000 due to market growth and improvements. Selling it yields a $200,000 profit (minus selling costs).
Related: What does it mean to invest in commercial real estate?
3. Other Ways CRE Investors Make Money
- Refinancing: Investors can take out a loan on a property after it appreciates, pulling out cash without selling.
- Tax Benefits: Depreciation deductions can reduce taxable income.
- Development: Buying land, building, and leasing or selling for profit.
💡 Key Insight: Commercial real estate is often about long-term investment. Investors rely on stable cash flow and property value growth rather than quick flips like some residential real estate deals.