What kind of money can you make investing in commercial real estate

As Tom Cruise’s character so famously said in the movie Jerry Maguire, “Show me the money!!!!” When you’re investing, you should know where your money is going, and have an idea of how much you could make. You should also understand how the investment makes money. 

Investments make money in one of two ways:

1. Buying something and selling it for more than you bought it.
2. Buying something, making it available to others, and earning a regular income from their use of it. 

Commercial real estate investing is no different. 

Making money through buying and selling commercial real estate.

You may have heard the saying, “You make money when you buy.” To maximize the difference between the purchase price of a property and its eventual selling price, the purchase price sets the bar that you need to jump over to make money. 

To achieve a high selling price for a property, you rely on something called appreciation. Market appreciation is the increase in a property’s value over time. Market appreciation is not guaranteed, but generally, real estate today is worth more than 5, 10, or 20 years ago. Forced appreciation involves making targeted improvements to a property to make it more valuable. 

You want to be sure that all costs (purchase price, operational costs, improvement and renovation costs, tax costs) are taken into account to make a realistic assessment of the return you might get on your money.

Your money is tied up in the property for the period you own it. Whether you're purchasing the property yourself or participating in a property syndication, you generally can’t withdraw your investment until the property is sold.

Making money through rental income. 

Unless an investment involves purchasing development land, or the purchase of a property that is in such a rundown state that it must be renovated before it can be made operational, commercial properties are purchased while in operation. As with any business, how well a commercial property is managed will impact the income that investors receive. Investment income is rental income less all operational costs, ranging from maintenance and repairs, improvements to the property, to business and tax expenses. 

To make money from rental income, the rental income should be higher than the sum of all the costs of managing that property, in this case, we say that the property is generating a positive cash flow. An important measure of how well a property is performing is called the cash-on-cash return. Simply put, the cash-on-cash return is the cash income (positive cash flow) that an investor receives relative to the cash they invested. For example, if you invest $20,000 in a property syndication and get $1000 in cash income from the investment per year, your annual rate of return is 5%.

Choose how you want to make money.

There are several combinations of the above two methods for investing in commercial real estate. When choosing which commercial real estate investment is best for you, you need to consider investments in terms of:

• Time horizon. When do you want your invested money back? Construction of a large multifamily apartment complex could take years, and you won’t see any rental income or profit during that period. 
• Risk profile. An operational, income-producing multifamily property has a different risk profile from a speculative development project in a new subdivision. 
• Taxes. Take time to understand the kinds of taxes that apply when investing in commercial real estate, as well as the tax deductions available to you. Consider speaking to a tax advisor to get more information about how an investment will impact your tax obligation.