Commercial real estate (CRE) has a long history of being an appealing financial play during both up and down market cycles, and it plays an important role in a diversification strategy for investors. It requires more money, skill, and time than most investors have available. It continues to be one of the most sought-after investment options. Market reports and industry analysts everywhere are drawing attention to this investing niche, leading many to ask: why commercial real estate?
The answer is simple: commercial real estate has repeatedly shown to be a profitable investment vehicle. The only difference now is that the advantages of commercial investing, as well as the way to getting started, are more obvious than ever. Continue reading to find out why commercial real estate, in particular, could be the right investment path for you.
Real estate investing is a straightforward process, so don’t panic. All you have to do is be patient, as it takes time to learn the various strategies of commercial real estate.
Six (6) Essential Factors You Should Know When Getting Started Investing in Commercial Real Estate
One of the reasons why commercial real estate appeals to a lot of investors is because of its broad nature.
- The most important factor to be considered is the location of the property.
According to studies, the correct location can increase sales by more than 50%. As a result, when purchasing a commercial property for business reasons, make sure that the property is handy, visible, and accessible to customers. This is why most business owners seek high-traffic commercial properties. Commercial real estate in such a favorable location will save a lot of money on advertising. A simple sign placed on the building, for example, will serve as a free billboard advertisement for the company.
- Real estate investments often generate consistent cash flow, with income given monthly, quarterly, or annually to investors. However, unlike stock dividends, the return is usually higher. For example, stocks can provide an annual return of 8–9% compounded annually, whereas CRE can provide up to 15% cash flow over the same time period.
There are two options for investors:
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- Equity Investment. This means buying minority ownership in a tangible asset, such as an apartment community or office building. Rent increases give the consistent cash flow that investors seek.
- Debt Investment. This is when you put money into a real estate loan and use an asset (land or a structure) as collateral. One of the most appealing aspects of this type of investment is that it is usually constructed to provide a predictable return.
- Leverage refers to the use of debt financing in deal structuring for commercial real estate. This is when a tiny initial cash commitment is used to generate a large return on investment. The notion is that any money that isn’t put into an investment can be spread out and used to buy multiple additional commercial properties instead. It will result in a larger portfolio and a higher overall return for the investor. When debt is placed on a property, the rate of return increases, which is referred to as positive leverage.
Losses are mitigated by diversification. Investors may still benefit from investments in other classes if one investment class underperforms. CRE should be an element of any portfolio that is truly diverse. Alternative investments, such as commercial real estate, should make up between 10 and 30 percent of a high-net-worth investor’s portfolio. In addition to stocks and bonds, including commercial real estate in your portfolio can assist diversify your overall investment plan.
- Real estate is an asset class that investors can literally touch and feel. While some building occupants may come and go, and building assessments may fluctuate throughout the course of its existence, the property itself will not vanish. For these and other reasons, savvy investors keep a good mix of tangible and intangible assets in their portfolios. In the case of intangibles, the investor is completely reliant on the actions of others to increase asset value. The beauty of real estate is that the owner is in charge of everything. If you own an office facility, you or your authorized asset/property manager are in charge of all spending and income decisions.
- There are tax advantages to owning CRE. When it comes to stocks and bonds, investors must set aside a portion of their earnings to pay capital gains taxes. These taxes must be paid unless the investment is part of their retirement account or a “qualified” plan. Capital gains, on the other hand, may be decreased or avoided entirely using CRE.
Because depreciation is a non-cash expense, it may provide the biggest tax benefit in commercial real estate. This means you obtain a significant tax deduction each year without having to spend any money.
The amount of taxes paid on the property’s cash flow is lowered year after year because depreciation is written off against ordinary income. When a loan is used to buy a commercial property, the investor can deduct the amount of mortgage interest paid each year from their taxable income.
Depreciation and interest expenditure deductions reduce income taxes, but they cannot be used to offset capital gains. Real estate investors, on the other hand, can delay capital gains when they sell a commercial property and reinvest the proceeds in another. Of course, a 1031 exchange only allows you to defer your capital gains tax, not completely avoid it. This means that once you finally sell a property, your tax will be calculated using the original property’s cost basis.
- Be Sure About Your Goals
Goals range from one real estate investor to the next, so set yours with a realistic timeframe in mind. Setting excessively lofty or unrealistic goals is a common blunder that you should avoid. Here are some tips to achieve those goals:
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- If you plan on developing vacant property, confirm that zoning will allow you to use the property as intended.
- Check to determine how many additional units a market can support if you wish to extend an existing building or construct a new one.
- Research the permitting procedures and expenses with the city or municipality where the property is located.
- Speak with other participants who have already invested in real estate and seek for referrals.
- To gain a sense of their track record, look at previous offerings and actual returns on closed investments.
- Inquire about their due diligence procedure. Examine how they evaluate each investment opportunity or choose which REIT or investment to make.
- Do a background check if it’s your first time working with someone in the private sector, even if it’s not necessary with a huge investment firm. While this may appear harsh, it is not unusual in larger CRE transactions.
- Continue to learn and try new tactics; you will undoubtedly succeed.
In Summary
For many investors, commercial real estate has and is becoming increasingly attractive. The JOBS Act of 2012, which permits investors to crowdfund — making CRE more accessible and safer for a broader range of people – adds to the appeal for certain investors. Henceforth, CRE is an investment vehicle that will continue to be lucrative as long as there is land and room for improvement.
Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE