Commercial property is sold for the rent values. All around you see small shops disappearing, vacancy rates are high. Large supermarkets and 24 hour convenience stores and petrol stations seem to be taking over. Even in these megamalls, most shop keepers are struggling just to pay the rent. Real estate historically has appreciated at a higher rate than inflation, what do you think this means for future rental income from retailers?

Great profits are made leasing buildings purpose built for a specific chain of businesses, but with each franchise having its own corporate style, a building specifically built for say a Harvey-Norman store is not going to be usable without major modification for another similar type of business. As a result, commercial property often has very poor resale prospects.

You need to invest in commercial real estate in a completely different way to residential, frequently the real estate must be packaged as part of a larger business deal. Arguably the most successful real estate investor the world has ever known was Ray Crock, the former milkshake machine salesman that turned McDonald's from an express burger bar into the most successful restaurant chain in the world.

An old anecdote tells of how Ray Crock was addressing a group of finance students. Everyone in the room of course knew who this great man was, so when he asked the group if they knew what it was that he did for a living, he was greeted by an amused silence.

He pressed the question and someone laughingly answered that of course Mr Crock was in the burger making business. Crock laughed back, but said the student was definitely wrong. He was in the real estate business.

Not following? Well, anyone who has ever had to taste a Big Mac, can probably fully appreciate that McDonald's is not the purveyor of the world's finest hamburgers. How then did McDonald's thus expand into such a powerhouse? The truth is in the way Crock sold his franchises. McDonald's at first did very well, fueled by undemanding but impatient Americans who just wanted their food delivered quickly and kids that didn't know any better, the restaurants achieved a good reputation as money machines. The chain did, however, stall for a period in the late 50s. It takes a lot of capital to continue strong growth in a large business. Running out of capital the restaurant chain almost collapsed under its own weight.

Crock's great expansion secret was that he bought land, built a restaurant on it and was able to charge a significant amount of rent on that site. Like all real estate, equity built up in acquisitions allowed the financing of further real estate purchases, which he built restaurants on and leased out to more franchisees all over the world. This is the power of real estate, the leverage of real estate equity and a method of securing long term high-rent paying tenants is what allowed McDonald's to expand relentlessly to the point that their overwhelming omnipresence has infused itself into popular culture and as a result of Ray Crock's financial genius, now anyone can enjoy that unique cow and cardboard taste in any city on the planet.

This shows the power of real estate, but also shows the massively different approach that must be taken with commercial real estate investing. With modern trends toward company downsizing, telecommuting, Internet shopping and mail order business and the decline of heavy industrial manufacturing, the future for the unsophisticated commercial real estate investor looks bleak.

Remember, a building is a depreciating asset, it is the land that appreciates in real estate. Commercial real estate is often sold with a substantial amount of business good-will built into the asking price, when a franchise moves premises, what is often left is an empty and ugly shell, requiring complete remodelling before it is usable again.

Some of the most successful commercial real estate investors are retailers in their own right, perhaps retired retailers. They understand the factors that influence rental returns far better than an average person ever could. It is a matter of taking advantage of your own area of expertise. Warren Buffett and Peter Lynch talk about investing in what you understand, don't invest outside of your area of competence. The people making large amounts of money in commercial real estate are most frequently businessmen who understand both sides of the equation. If that sounds like you, good luck, otherwise passive investors should be well aware that commercial real estate is a very specific enterprise where certain skills are required far removed from most people's experience.

Commercial real estate frequently has much higher rent yields than residential, longer lease periods, better tenants who look after the property and the potential for higher capital gain. Though these advantages are substantial, the pitfalls are also serious, great volatility in prices (larger % falls when prices to drop), the potential for very long vacancies, the need sometimes to provide leasing incentives and the fact that commercial property is often very much more expensive than residential, the price being propped up by high rents. For a commercial specialist the rewards can be great, but for the time being the aus.invest FAQ will limit itself in the main to direct residential investment, as it is an area where fewer very specialised skills are required, though this doesn't mean one should trivialise residential analysis, both are difficult fields requiring plenty of knowledge.

As a reminder, if you want to achieve similar returns to what commercial property investors earn, but without the hassle of having to manage a building, a property securities index fund is an excellent way to invest, and there are many funds that invest in direct property as well. The economies of scale in large commercial buildings mean that expenses are much lower as a proportion of rental income than they are for residential property, so despite the fees charged by a managed fund income is still often superior for indirect managed commercial property than it is with direct residential property.