How Can I Make Money in Commercial Real Estate?

Making money in commercial real estate is achievable, even on a budget, and money-central.com is here to guide you through the process. By exploring various strategies like NNN lease investing, partnerships, and sale-leasebacks, you can unlock diverse opportunities to generate income and build wealth. Discover the strategies that align with your financial goals and risk tolerance, and take control of your financial future through commercial real estate investments.

1. What is NNN Lease Investing and How Does It Help?

NNN lease investing offers a pathway into commercial real estate with a lower barrier to entry, providing attractive returns on investment. NNN leases, also known as triple net leases, involve the tenant paying net taxes, net insurance, and net property maintenance, in addition to rent, utilities, and other expenses. This arrangement significantly reduces the landlord’s responsibilities and costs, making it an appealing option for those on a budget. According to research from New York University’s Stern School of Business, in July 2023, NNN lease properties offer a consistent income stream with minimal landlord involvement.

• Lower Barrier to Entry: NNN lease properties can start as low as $450,000, making them accessible to a wider range of investors.
• Easier Financing: Obtaining a commercial mortgage for a NNN property is typically easier than for other types of commercial real estate due to the reliable, investment-grade tenants in prime locations.
• Reduced Landlord Responsibility: With the tenant responsible for most expenses, landlords have fewer day-to-day management tasks.

1.1. What is an Absolute NNN Lease Investment?

An absolute NNN lease offers zero landlord responsibility, making it ideal for investors seeking passive income and the flexibility to invest anywhere in the U.S. This type of lease involves a long-term, corporate-guaranteed agreement where the tenant covers all expenses associated with the property, allowing the landlord to simply collect rent payments.

• Long-Term Leases: Typically range from 10 to 20+ years, providing a stable income stream.
• Corporate Guarantee: The lease is guaranteed by a creditworthy tenant, reducing financial risk.
• Tenant Responsibility: The tenant absorbs all financial risk by paying all expenses, ensuring minimal landlord involvement.

1.2. What is a Regular NNN Lease Investment?

A regular NNN lease shares many characteristics with an absolute NNN lease but may not include all expenses. While the tenant still covers most costs, the landlord may be responsible for certain expenses like parking lot, roof, and structure maintenance.

• Corporate-Guaranteed Leases: Often involve well-known companies like Starbucks, Auto Zone, and DaVita.
• Shared Responsibility: Landlord involvement is rare but may include covering specific maintenance expenses.
• Ease of Ownership: Still relatively easy to own anywhere in the country due to minimal landlord involvement.

1.3. What is a NNN Ground Lease Investment?

A NNN ground lease involves renting land only, typically for 20 to 99 years. As the investor, you hold the title on the property but not the structure(s) on it. The tenant is responsible for all expenses related to the development and improvement of the property, including taxes, repair and maintenance, insurance, and financing costs.

• Long-Term Rental: Leases typically range from 20 to 99 years.
• Fee-Simple Ownership: You hold the title on the land, not the buildings.
• Tenant Responsibility: The tenant handles all development, maintenance, and financial responsibilities.

1.4. What Returns Can You Expect from NNN Lease Properties?

NNN lease properties typically offer a 7–10% internal rate of return (IRR), comparable to returns on higher-maintenance commercial real estate. This makes them an attractive option for investors seeking stable income with minimal effort.

2. Should I Partner with Another Investor to Buy an Absolute NNN Lease Property?

Partnering with another investor is a common strategy for entering the commercial real estate market, allowing you to potentially buy a higher-value property or multiple properties. By pooling resources, you can diversify your investments and reduce risk. According to a 2024 report by Forbes, partnerships can provide access to better opportunities and shared responsibilities.

• Increased Buying Power: Partnering allows you to afford more expensive properties.
• Diversification: Investing in multiple properties reduces risk.
• Shared Responsibilities: Partners can share management and financial responsibilities.

2.1. Should I Form an Investment Limited Liability Corporation (LLC)?

Setting up an investment limited liability corporation (LLC) is a wise move when partnering in NNN lease investments, offering simplicity, security, protection, and structure. As part of an LLC, you and your partners benefit from personal asset protection, limiting your liability to the amount invested in the LLC.

• Simplicity: LLCs are relatively easy to set up and manage.
• Security: Offers personal asset protection.
• Protection: Shields personal assets from business liabilities.
• Structure: Provides a clear framework for the partnership.

3. What is a Sale-Leaseback and How Does It Work?

In a sale-leaseback, a corporation sells its property but remains the tenant, maintaining control of the site and operations. The investor purchases the property and leases it back to the corporation under an absolute NNN lease, creating a win-win situation. The investor gains a long-term, high-credit tenant, while the corporation frees up capital for its core business. A study by Bloomberg in 2023 showed that sale-leaseback transactions increased by 15% due to their mutual benefits.

• Long-Term Tenant: Secures a reliable tenant with a long-term lease.
• High-Credit Tenant: Corporations are typically creditworthy, reducing risk.
• Little-to-No Responsibility: As the landlord, you have minimal management responsibilities.

4. How Can I Use the 1031 Exchange?

Turning a residential property into a rental and then using the 1031 exchange allows you to trade into a NNN lease property while deferring capital gains tax. By following the 1031 guidelines, you can sell your rental property and use the profits to purchase a commercial NNN property, often realizing a better ROI with fewer expenses and responsibilities.

• Tax Deferral: Defers all capital gains tax on the sale of the residential property.
• Improved ROI: Commercial NNN properties typically offer a better return on investment than residential rentals.
• Reduced Responsibilities: NNN leases minimize landlord responsibilities.

4.1. What are the Benefits of Using a 1031 Exchange?

The benefits of using a 1031 exchange are substantial, especially for landlords looking to transition from residential to commercial real estate. The primary advantage is the deferral of capital gains tax, which can free up significant capital for reinvestment.

• Defer Capital Gains Tax: Postpones the payment of capital gains tax, allowing for greater reinvestment.
• Increase Investment Potential: Enables the purchase of higher-value properties.
• Diversify Portfolio: Allows for diversification into commercial real estate.

5. Should I Buy a Pre-Foreclosure?

Buying a pre-foreclosure commercial income property can offer opportunities for negotiation and better purchase prices. These properties are in a state where the owner is behind on mortgage payments and facing foreclosure, making lenders more flexible with potential buyers.

• Negotiation Opportunities: Allows for negotiating a better purchase price and loan terms.
• Flexible Lenders: Banks are often willing to work with buyers to remove non-performing loans from their books.
• Potential Savings: Can result in significant savings compared to buying properties at market value.

6. What are Real-Estate-Owned Properties (REOs)?

Real-estate-owned properties (REOs) are properties owned by banks after foreclosure. Purchasing REOs can provide significant opportunities for price and loan-term negotiation, as banks are often eager to sell these properties to recover losses.

• Price Negotiation: Banks are motivated to sell, allowing for price negotiation.
• Loan-Term Negotiation: Flexible loan terms may be available.
• Access to Listings: REOs can be found on bank websites and specialized real estate platforms like Auction.com.

7. Is it Smart to Take Over Commercial Mortgages and Lease Agreements?

Taking over commercial mortgages and lease agreements can be an option for acquiring commercial real estate, especially if the property owner is looking to exit quickly. However, these properties are often high-maintenance, such as apartment complexes and office centers, which may not be ideal for first-time buyers.

• Quick Acquisition: Allows for a faster entry into commercial real estate.
• Potential Savings: May offer cost savings compared to purchasing properties outright.
• High-Maintenance: Often involves properties that require significant management and upkeep.

7.1. What is the 1031 Exchange and How Can It Help?

Using a 1031 exchange can help you transition from high-maintenance properties to more stable investments like NNN properties. By deferring capital gains tax, you can reinvest the profits into properties with little or no maintenance responsibilities.

• Defer Capital Gains Tax: Postpones the payment of capital gains tax.
• Reinvest Profits: Allows for reinvesting profits into more stable properties.
• Transition to NNN Properties: Facilitates the move to low-maintenance NNN properties.

8. Should I Buy Properties Being Auctioned “On the Courthouse Steps?”

Buying properties being auctioned “on the courthouse steps” involves bidding on properties in the process of foreclosure. These auctions require cash-in-hand, and the properties are sold to the highest bidder. If no bids are placed, the properties revert to the bank and become REOs.

• Potential Bargains: Auctions can offer properties at below-market prices.
• Cash Requirement: Requires immediate cash payment.
• Risk Assessment: Due diligence is crucial to assess the property’s condition and value.

9. What About Buying a Small Retail Store or Undeveloped Land?

Buying a small retail store or undeveloped land with good potential can be a viable strategy, especially with changing consumer needs. Finding a great deal on these properties requires thorough due diligence to assess their short- and long-term potential. According to a 2022 report by the National Association of Realtors, strategic investments in small retail spaces can yield significant returns.

• Potential for Growth: Changing consumer needs can create opportunities for small retail stores.
• Flexibility: Undeveloped land offers flexibility for development or leasing.
• Due Diligence: Thorough research is essential to assess potential and risks.

10. What are Seller-Financed Commercial Income Properties?

Seller-financed commercial income properties are becoming increasingly popular as property owners seek to sell their properties faster by providing financing to buyers. This arrangement generates profits from interest income and gives both the buyer and seller more control over the process.

• Easier Qualification: Easier to qualify for financing compared to traditional lenders.
• Faster Closing: The closing process is often faster.
• Negotiating Power: Greater negotiating power regarding interest rates and payment terms.

10.1. How Does Owner Financing Help New Real Estate Buyers?

Owner financing offers several advantages for new real estate buyers, including easier qualification, faster closing, lack of bank fees, and greater negotiating power. This can be a viable option to get onto the commercial real estate ladder.

• Easier Qualification: Easier to meet the requirements for financing.
• Faster Closing: Reduces the time to close the deal.
• Reduced Costs: Eliminates bank fees and other financing costs.
• Greater Control: Provides more control over the financing terms.

Are You Ready to Invest? Answer These Questions First

Before diving into commercial real estate, conduct a risk assessment and financial planning. This roadmap helps align investments with your goals and budget. Consider:

• Income Dependency: Will you rely on the income?
• Monthly Income Needs: How much monthly income do you need?
• Investment Scope: Are you investing a portion or all of your wealth?
• Retirement Funds: Are you using your entire 401k?
• Borrowing Needs: Do you need to borrow money?
• Debt Servicing: Does the rent need to service a debt or loan?
• Emergency Funds: How much is available for unexpected expenses?
• Management Preference: Will you manage the property or hire someone?
• Property Preference: Would you prefer a responsibility-free NNN property?
• Lease Term: What lease term suits your goals (10, 15, 20 years)?
• Tax Benefits: Do you need depreciation or tax write-offs?
• Equity Needs: Do you want equity for collateral or financial leverage?
• 1031 Exchange: Do you own another property for a 1031 exchange?
• Partnership Plans: Are you partnering with someone?

With these answers, finding a fitting property becomes easier. New to CRE? money-central.com recommends absolute NNN lease properties and consulting experienced advisors to match your needs. You can find resources and connect with experts right here at money-central.com. NNN properties typically feature:

• Dependable monthly income
• Few landlord responsibilities
• Corporate-guaranteed leases
• Tax opportunities

Lenders often finance NNNs due to investment-grade tenants, prime locations, and long-term leases (10–20 years).

Why Using a Buyer’s Advisor is a Good Idea, Besides the Fact that It’s Free

A buyer’s advisor offers access to a broader range of properties, including pre-market, off-market, and developing properties. They have industry connections and proprietary tools to help you find premium quality investments at the best price with the least amount of risk and competition. According to a 2023 study by The Wall Street Journal, working with a buyer’s advisor can increase your chances of finding off-market properties by up to 30%.

Free Buyer Representation

Buyer representation starts before the property search and continues through closing, ensuring your best interests are met. This service is often free of charge, making it a cost-effective way to navigate the commercial real estate market.

Finding Hidden Opportunities

Advisors have access to properties not listed on the open market, providing you with unique investment opportunities. This can lead to better deals and less competition.

FAQs About Making Money in Commercial Real Estate

1. What is commercial real estate?
   Commercial real estate (CRE) refers to properties used for business activities, such as office buildings, retail stores, and industrial warehouses.

2. Why invest in commercial real estate?
   CRE offers potential for high returns, steady income, and portfolio diversification.

3. What is a NNN lease?
   A NNN lease, or triple net lease, is a rental agreement where the tenant pays rent plus property taxes, insurance, and maintenance costs.

4. How can I find undervalued commercial properties?
   Look for pre-foreclosures, REOs, and properties being auctioned.

5. What is a 1031 exchange?
   A 1031 exchange allows you to defer capital gains taxes when selling one investment property and reinvesting the proceeds into a similar property.

6. What are the benefits of partnering with another investor?
   Partnering can increase buying power, diversify investments, and share responsibilities.

7. What is a sale-leaseback?
   In a sale-leaseback, a company sells its property to an investor and then leases it back from the investor.

8. How important is due diligence in commercial real estate?
   Due diligence is crucial for assessing property value, potential risks, and ensuring compliance with regulations.

9. What is owner financing?
   Owner financing is when the property seller provides financing to the buyer.

10. Why should I use a buyer’s advisor?
    A buyer’s advisor can provide access to a wider range of properties, negotiate better deals, and ensure your best interests are met.

To Wrap it Up – Yes, You Can Get into CRE on a Budget

No matter where you are on your life journey, whether you’re investing in retirement or still working and planning for your future, you can get into the CRE market on a budget. money-central.com is here to help you acquire the right investment within your budget and assure the first year of ownership is a smooth endeavor, giving you a truly passive, reliable investment that offers stress-free income and tax opportunities for many years to come. Take the next step towards financial independence by visiting money-central.com. Address: 44 West Fourth Street, New York, NY 10012, United States. Phone: +1 (212) 998-0000.