6 Reasons to Invest in Commercial Real Estate
While investing in commercial real estate can seem intimidating, it is usually an excellent investment with attractive yields. Overall, real estate investments are used to generate profit and income for the investor. If you’re new to commercial real estate, let’s cover some of the basics.
What is commercial property?
Commercial real estate is a rather broad term and includes office and medical buildings, shopping centers, restaurants, hotels, warehouses, industrial complexes and more. When investing, many people choose real estate over stocks and bonds. It lacks the volatility of the stock market, and the yields generally outperform other types of investments such as bonds, mutual funds, residential real estate and cash savings.
In its simplest form, commercial real estate investors purchase property and either occupy the space for their own business operations or lease the units, charging tenants rent for the use of the building. Tenants can be retail shop owners, business owners, industrial manufacturers, medical practices – or other types of occupants depending on the building.
As with any investment, there are risks associated with the reward. The economy can suffer, and tenant occupancy can decline. This can have a negative impact on your cash flow and subsequent ability to meet your financial obligations. Or you could purchase property in a poorly performing area. As they say in real estate, “location, location, location,” so make sure you understand your market.
Though there are some risks, the rewards can be significant. Here are six reasons to consider investing in commercial real estate.
1. Commercial Property Tax benefits
There can be multiple tax benefits for real estate investors, and one key aspect is depreciation. As the building ages, it depreciates as an asset though typically the market value is increasing. As an investor, you are realizing a tax loss from the depreciation while your investment is growing in its value.
Other tax benefits include low capital gains rates when selling your investment. Depending on your tax bracket, your capital gains rate can range from 0% to 20%, which is often less than income tax rates.
These are just a few of the tax benefits. Be sure to speak with a qualified tax attorney before making an investment.
2. Excellent Value Appreciation
Compared to other investments, commercial real estate usually appreciates more quickly. While a good return on investment differs from area to area based on various market conditions, according to the S&P 500 Index, the average annual return over the past 20 years is approximately 8.6%. Commercial real estate yield also outperforms key stock indices when compared over time.
3. Commercial Properties Provide Steady income
Another investment benefit is a steady cash flow. Commercial leases are usually multi-year leases, and generating consistent monthly income from multiple tenants is an attractive advantage to most investors. Unlike residential rental investment, there is less tenant turnover so greater income stability.
Many commercial leases are negotiated as triple-net. This means the tenants pay the yearly property taxes, property insurance and maintenance costs – resulting in an added income boost for the investor.
4. Leverage in Commercial Real Estate
Using leverage is one of the biggest advantages of real estate investing, and when managed well, can significantly increase your income potential. If you’re unfamiliar with the concept of leveraging, it’s a useful tool for growing your wealth and investment portfolio.
Here’s a basic explanation of leveraging: Most commercial real estate loans require 20% down to qualify for loan financing. For example, if you have $160,000 cash, that could mean the purchase of an $800,000 multi-unit building with bank financing. As the building increases in value and the principal on the loan goes down, you can take advantage of those two factors and leverage that initial $160,000 investment to purchase additional commercial real estate properties. That’s why leveraging can be an essential part of a strategy for increasing your wealth over time.
5. Hard Assets
Commercial real estate is a tangible asset, meaning there is an actual physical structure. More than likely, the building will not disappear. Corporations can go under and owning stock shares can become meaningless when they do. Despite any ups and downs of the economy, the commercial property still stands as a hard asset.
6. Equity REIT & Real Estate Investing
Though they do not offer all the advantages of a commercial real estate investment, an equity real estate investment trust (REIT) is a way to participate in the market when you lack the capital to purchase commercial property. An equity REIT owns and manages income-producing commercial real estate. As an investor, you buy shares in the REIT. It’s a great way to diversify your stock portfolio. Plus, investors receive dividends regularly, such as monthly or quarterly, so there is consistent cash flow.
The Benefits of Commercial Property Investment – The Bottom Line
If you are looking for an income-generating, long-term investment that performs well and lacks volatility, commercial real estate is an attractive consideration. Knowing some of these basics can make the investment less intimidating while you explore the options for your wealth management.
Owner-Occupied Real Estate Investing
In our business at Bobbitt, we often build or renovate space for commercial real estate investors. Many times, new building owners are developing space for their own business needs – seeking to maximize ROI with ownership, rather than leasing a building with the equity going into someone else’s pocket. In recent years, with the demand for flex space, some investors are generating income and profits by occupying part of a facility and leasing out unused space. In either case, if your next commercial real estate investment calls for new construction or fit-up, contact Bobbitt Design Build in North or South Carolina to see how we can lend our expertise.