Building a Commercial Real Estate Portfolio: Should You Diversify?

Upwards shot of Chicago downtown buildings

There are many ways to invest in real estate. How you diversify depends on your objectives, allotted time, and risk tolerance. Investors looking to build long-term wealth will want to build a diversified real estate portfolio.

When beginning to invest in real estate, carefully consider your goals and make them as specific as possible. How long will you invest to achieve your goals and how much risk are you willing to take. Risk is necessary to achieve the desired gains, and usually larger risks are necessary to achieve the largest gains. But with risk comes the possibility of losses. You should know yourself and your risk tolerance before you begin investing or you might spend many sleepless nights worrying about your investment.

Types of Commercial Real Estate Investments

There are five basic types of real estate for investment in the Chicago area and many variations of each. Let’s briefly discuss the pros and cons of each.

  • Land Investments – Investing in land can be rewarding if you understand the market and have a plan to make a profit on it. Land that is not earning income will be a drain in taxes and upkeep. But many investors lease rural land for farming, logging, or they hold it for future development. Most urban land is purchased for building or for a specific purpose.
  • Office and Retail Space – Office and retail space are similar and both are in demand in most cities. One important point of investing in either office or retail space is location. You need to be sure that the location has enough prospective businesses to fill the available units. But once you have found the right tenant, you may be able to negotiate long leases with built-in increases over time.
  • Multi-Family Housing – A well-maintained apartment building in the right location can generate a steady stream of income and quickly turn a profit. Many commercial real estate investors begin with multi-family housing, but it can be a full-time job unless you hire an accredited property manager.
  • Industrial Properties – Industrial property includes warehouses, manufacturing facilities, distribution facilities, showrooms, research facilities and other similar uses. You’ll want to carefully gauge the potential uses and demand of the property before investing in industrial property.
  • Storage Units – Storage units are often overlooked in commercial real estate, but there is money to be made in such units. You’ll need onsite management of some kind, but other costs are low. You can make money in the big city or in small towns with these units if you choose the right location without too much competition.

Balancing Risk and Reward

If your long-term goals include wealth building, you probably will want to diversify into several projects. Be patient, however, and get a good handle on your first project before you move forward too quickly. Commercial real estate has some advantages as an investment vehicle, but it also has some unique risks that should be considered.

Rewards of Chicago Commercial Real Estate Investment

  • Easy to get into, learn by research and talking to other investors
  • Large variety of opportunities
  • Ability to use leverage
  • Long-term appreciation
  • Generates income
  • Provides tax benefits: deductions, depreciation, and deferability
  • Ideal for wealth building

Risks of Investments in Chicago Commercial Real Estate

  • All real estate investments carry risk. Problems can occur with tenants, zoning, property management, maintenance or a hundred other places that you haven’t thought of yet.
  • New investors lack knowledge and experience
  • Requires capital investment and ties it up for the long term
  • Unexpected economic factors such as a recession, or a downturn in a neighborhood can reduce your profits and may require additional investment.

There are other risks and rewards that are specific to each property and it is up to you to analyze these risks and rewards to determine whether you should invest in a specific property and how many properties you can handle overall. The best strategy is to work with a knowledgeable mentor who is willing to teach you what you need to know and work with a Chicago commercial real estate management company who is familiar with the neighborhoods and can give you good advice.

Managing Your Commercial Properties

Depending on the type of commercial real estate that you choose, active management will most likely be required. Whether you need an on-site manager in an apartment building or storage units, or advice