If you are looking for ways to diversify your portfolio, investing in commercial property may be an option. Many of today’s millionaires and billionaires are avid real estate investors. The attraction of commercial real estate is that these investments produce income and increase wealth. However, there are a few things you should know before you begin investing in these properties.

Investment Evaluations

Unlike residential real estate, commercial property investments should be measured using several financial calculations. First, you need to know how much income you will receive from the investment on an annual basis. You should calculate your total income and subtract your expenses to determine your net operating income. Your internal rate of return also evaluates the property over the life of your investment based on its future projected value.

You also need to calculate the capitalization rate, which is the rate of return each year. This figure does not account for the cost of the debt you have against the property. This is a good tool for comparing properties. Finally, you need to understand the cost of your debt service, which is comprised of your monthly loan payments.

Types of Properties

You may be surprised at the number and types of properties that are considered commercial. Industrial properties, such as distribution centers or warehouses, manufacturing facilities, refineries and research facilities are all commercial properties. You probably also know that retail space and office buildings fall under the commercial real estate title. However, did you know that apartment buildings or multifamily homes with four or more units are also considered to be commercial properties?

Income Potential

Unlike stocks, bonds, and other financial investments, real estate provides several income streams. First, you can lease the property and earn rental income. This income increases your monthly cash flow. In addition, the leases on many types of commercial properties tend to be long-term, multiyear contracts, so your income is secured for longer periods of time.

You can also earn returns on investment through increases in your property’s value. Although most real estate appreciates in value, it is vital that you do your due diligence because some actually decline as well. You can take advantage of your appreciated value when you sell the property, or you can leverage your equity and purchase additional properties.

To learn if commercial real estate investing is for you, find a mentor and do some research on the process and potential returns.