Investing in Commercial real estate (CRE) has long been an attractive financial opportunity, performing well in both up and down market cycles. It plays a key role in a diversified investment strategy, though it often requires more money, skill, and time than many investors have available. Despite these challenges, CRE remains one of the most sought-after investment options. Analysts and market reports are increasingly highlighting this niche, prompting many to ask: why commercial real estate?
The answer is simple: CRE has consistently proven to be a profitable investment. What has changed now is that both the benefits of commercial investing and the steps to get started are more clear than ever. Keep reading to learn why investing in CRE is best for you
Six Essential Factors for Starting in Commercial Real Estate
One reason commercial real estate attracts investors is its broad nature. Here are six important factors to consider before diving into CRE:
1. Location is Key
The most critical factor in CRE is the location of the property. Studies show that the right location can increase sales by more than 50%. When purchasing commercial property, choose a location that is convenient, visible, and accessible to customers. High-traffic areas can save money on advertising. A well-placed sign on the building can serve as a free billboard for your business.
2. Consistent Cash Flow
Real estate investments often provide steady cash flow, with income paid monthly, quarterly, or annually. Unlike stock dividends, real estate returns tend to be higher. While stocks may provide an 8-9% annual return, CRE can generate up to 15% cash flow over the same period.
3. Two Types of Investment Options
There are two main ways on investing in commercial real estate:
- Equity Investment: You buy ownership in a tangible asset, like an office building or apartment complex. Rental income then provides steady cash flow.
- Debt Investment: You invest in a real estate loan, using an asset (like land or a building) as collateral. This type of investment often offers predictable returns.
4. Leverage Increases Returns
Leverage in CRE means using debt to finance a property, which can boost returns. A small cash investment can be used to buy multiple properties, increasing your portfolio and overall return. When debt is placed on a property, the rate of return increases, a concept known as positive leverage.
5. Diversification Minimizes Risk
CRE helps diversify an investment portfolio, reducing risks. If one investment underperforms, others can balance the portfolio. Experts suggest allocating 10-30% of a high-net-worth investor’s portfolio to alternative investments, including commercial real estate, along with stocks and bonds.
6. Tangible Assets Offer Control
Real estate is a physical asset you can touch and control. While tenants may come and go, the property remains. This tangibility is a key reason investors prefer CRE over intangible assets like stocks, where you’re reliant on others to manage performance. As a property owner, you or your property manager control expenses and income decisions, providing greater control over asset value.
Tax Advantages of Commercial Real Estate
There are significant tax benefits to owning commercial property. Unlike stocks and bonds, where capital gains taxes are inevitable, CRE offers ways to reduce or defer these taxes.
- Depreciation: This non-cash expense allows you to deduct a portion of the property’s value each year, reducing taxable income. Even though no money is spent, you still receive a significant tax deduction.
- Interest Deductions: When financing a commercial property, the interest paid on the loan can be deducted from taxable income, further reducing tax liability.
- 1031 Exchange: Real estate investors can delay paying capital gains taxes by reinvesting the proceeds of a property sale into another property. Although taxes are deferred (not avoided entirely), the 1031 exchange can be a useful tool for long-term investors.
Setting Realistic Goals on Investing in CRE
Every investor’s goals are different, so set yours with a realistic timeframe. Avoid setting unrealistic expectations. Here are a few tips to help you achieve your CRE goals:
- Ensure zoning regulations support your intended property use.
- If you plan to develop or expand a property, research how many additional units the market can support.
- Learn about the permitting process and associated costs in your area.
- Connect with other real estate investors for referrals and insights.
- Investigate the due diligence processes of investment firms and REITs to understand how they evaluate opportunities.
Final Thoughts
Commercial real estate is becoming increasingly attractive to investors. The 2012 JOBS Act, which allows investors to crowdfund, has made CRE more accessible to a broader range of people. As long as land and properties exist, commercial real estate will continue to be a lucrative investment option.
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Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!