Fundamentals of CRE
Before embarking on a journey into the commercial real estate world, one must learn the nitty-gritty of the field - how properties are defined, what return rates are available, and the different types of investments.
Classifications Properties are classified by their submarket, as opposed to using street names and addresses like in everyday speech. Submarkets include more generalized locations such as neighborhoods, cities, and larger regions.
Leases Oftentimes, landlords and tenants create agreements, granting the tenant (lessee) the right to take possession of a property for a given duration. Rent is charged for lease agreements.
Subleases are leases granted by a tenant to another person to occupy some or all of the tenant's property for a specified term. Learn more details in our Leasing Guide.
Returns Annual returns on commercial real estate investment commonly succumb to two categories: cap rates and stabilized returns. A cap (capitalization) rate is the initial annual return (annual rental income of the property ÷ purchase price). The higher the CAP rate, the more rental income the property produces. Stabilized returns, conversely, are calculated after a property has been taken full advantage of. This is due to the fact that stabilized returns derive from leases with imminent expiration or other pending changes.
Investing Commercial real estate earnings vary greatly, depending on the risk an investor is willing to take.