Have you ever considered Commercial Real Estate as an alternative investment vehicle? Today, I want to guide beginners through the process of investing in Commercial Real Estate right here in Madison, Wisconsin.
Investing in this asset class can be an alluring alternative to traditional investments like residential real estate, the stock market, and early-stage investing. Let's explore why and how to get started.
Why Choose Commercial Real Estate (in Madison, WI)?
Diversify Your Portfolio
Investing in Commercial Real Estate offers a unique opportunity to diversify your investment portfolio. While residential real estate and stocks are more commonly chosen, CRE adds a layer of diversification that can help balance your risk and potentially yield higher returns.
In Madison, Wisconsin, the Commercial Real Estate market has shown remarkable resilience over the last decade, even during economic downturns. It's crucial to note that diversification across different asset classes can help safeguard your investments against market volatility. Of course, every investment holds some risk so it's critical to weigh those before moving forward and decide if you can tolerate the risk.
Impressive Returns on Investment
If you're seeking substantial returns on your investment, Commercial Real Estate has a compelling track record. Over the past 10 years, CRE investments have outperformed many other asset classes. Let's take a closer look at some statistics to illustrate this point:
According to the National Council of Real Estate Investment Fiduciaries (NCREIF), the average annual return on Commercial Real Estate investments in the U.S. ranged from 8% to 12% during the past decade.
In Madison, WI, the local CRE market has also seen steady growth, with an average annual return on investment exceeding 9%. Much of this growth has been driven by the University of Wisconsin-Madison and also the rapidly growing suburban areas including Verona, Middleton, Fitchburg, Waunakee, and Stoughton.
These impressive returns have undoubtedly piqued the interest of investors looking to maximize their profits.
The Risks of Commercial Real Estate
While the potential for lucrative returns in commercial real estate is undeniable, it's crucial to be aware of the associated risks. Here are some key risks to consider:
Market Volatility
Commercial Real Estate markets can be susceptible to economic downturns and fluctuations. During the Great Recession, many investors experienced significant losses as property values plummeted, and tenants struggled to pay rent.
High Barriers to Entry
Unlike other investment options, getting into Commercial Real Estate can be challenging. The cost of entry is often higher, with substantial down payments required — commonly 20-25% of the purchase price. Moreover, lenders became more risk-averse after the Great Recession, making it harder for newcomers to secure financing.
Economic Dependence
The performance of your commercial property can heavily depend on the economic conditions of the area. If Madison's economy were to face a downturn, your investment might suffer in the short-term.
Creative Strategies for Beginners
Now that we've explored the rewards and risks of Commercial Real Estate, let's discuss some creative strategies for beginners looking to make their mark in Madison's thriving CRE market.
Start Small with a Partner: Consider teaming up with an experienced partner or real estate investment group to share the financial burden and risk. This collaboration can provide valuable insights and reduce your initial investment and makes the initial investment more palatable for most.
Real Estate Crowdfunding: Explore real estate crowdfunding platforms that allow you to invest in commercial properties alongside other investors with smaller capital contributions. This approach diversifies your risk while giving you access to larger assets.
Lease to Local Businesses: Target local businesses looking to lease commercial space. Forming relationships with established businesses can lead to stable rental income, making it easier to weather economic fluctuations.
Location Matters: Pay close attention to the location of the property. Madison, WI has its unique neighborhoods and commercial districts. Conduct thorough research to identify areas with growth potential and high demand for commercial spaces. Remember, "Location, Location, Location!"
Understand Lease Agreements: Familiarize yourself with lease agreements and consider hiring a property management company to handle tenant relationships and property maintenance. A well-structured lease can provide stability and security for your investment.
In conclusion, investing in Commercial Real Estate can be an excellent choice for those looking to diversify their portfolio and reap the rewards of a resilient market. However, it's essential to acknowledge and mitigate the associated risks, especially considering the historical impact of the Great Recession on credit lending.
As you embark on your CRE journey, remember that patience, research, and a sound strategy are your best allies. Collaborative Commercial is here to guide you through every step of your Commercial Real Estate investment. Feel free to reach out for personalized advice and assistance. Happy investing!
Jason Huett Collaborative Commercial, CEO/CMO