Commercial real estate has proven to be a very profitable investment. Many fortunes have been made through real estate investing. However, many people have little if any money invested in commercial real estate.
Here are 7 top reasons to invest in commercial real estate and how it compares with some other common investments.
First, what are some examples of commercial real estate?
For the purposes of this analysis, commercial real estate can be defined as income producing real estate assets. Apartment buildings, office buildings, retail stores, industrial properties, storage centers, land and hotels are all types of commercial real estate.
Single family homes and condominiums can also be considered income producing properties if they are rented out to tenants rather than used as owner occupied homes.
Top 7 Reasons to Invest in Commercial Real Estate
1.High Returns with Limited Downside
Real Estate has performed very well over time compared to a variety of other investments. The historical returns of real estate are similar historical stock market returns. But commercial real estate values will not drop as much or as quickly as stocks in a market downturn.
Real estate also contains inherent value because it is a tangible asset with utility. The underlaying land cannot be destroyed and more land cannot be created. A property cannot lose all its value because it can always be put to some use. Individual companies can go bankrupt giving a stock investor a total loss. A property is not going to become completely obsolete like some company business models.
High returns along with inherent value make real estate a safe and profitable long term investment.
2.Consistent Cash Flow and Property Appreciation
Commercial real estate provides a consistent cash flow along with the underlying property appreciation. For example, an apartment building will produce a cash flow stream to the owner based on all rent collected minus expenses. This cash flow stream will generally increase over time as rental rates continue to increase.
The property value will also go up over time along with increases in the property’s net cash flow. Commercial properties are typically valued based upon the net cash flows they produce or are expected to produce in the future.
Properties will appreciate at different rates based on the supply and demand characteristics in specific markets. But real estate has historically increased in value well above the rate of inflation.
Real estate provides the dual benefit of an increasing income stream as well as long term property value appreciation. Few other investments types can deliver these attractive characteristics.
Real estate experiences less severe market fluctuations compared to other types of high return liquid investments. Stocks, commodities, high yield bonds, and cryptocurrencies can all show high levels of price fluctuations in short time periods. High volatility and the ability to quickly sell these other types of investments based on emotions can make it difficult to achieve positive returns.
Real estate prices move up or down more gradually over time, and price quotes are not available daily.
It usually takes at least several months at a minimum to sell a property. An investor should feel less tempted to sell quickly at a bad time due to these more limited price fluctuations. The investor also has the benefit of continuing to earn a consistent income during a temporary market downturn.
4.Leverage on Favorable Terms
Real estate is often purchased using leverage or borrowed money that includes favorable terms compared to other investment loan terms. Conservative leverage can significantly boost the returns on a real estate investment without much additional risk.
Real estate loans are usually long term (5 years or more) with the property used as the only collateral. Many commercial loans are also non-recourse, meaning the buyer is not personally liable for debt repayment if the loan cannot be repaid.
Leveraged real estate is not at risk of a forced sale or margin call if the property value drops below a certain level. Other leveraged investments such as stocks, commodities, and currencies can be “called” or forcibly sold by the lender at the worst times leaving an investor with a total loss.
Real estate has historically provided investors with great protection against inflation. Overtime, properties and their income streams appreciate faster than the rate of inflation. In periods of high inflation both the property value and income can increase at similar rates.
Because real estate is usually financed with borrowed money, an investor benefits during high inflation periods by paying back lenders in dollars now worth significantly less. The investor still receives the benefit of an increasing income and property value.
Real estate affords investors many benefits in the tax code with a few examples noted here.
A 1031 exchange is a provision of the tax code where an owner can exchange an investment property for another investment property of equal or greater value while deferring any capital gains taxes.
An owner can receive a large cash payout tax free when refinancing property that has increased in value. The owner receives the untaxed cash payout due to the difference in value between the new loan and existing loan.
Property owners may also deduct a variety of property and capital expenses. A few common deductions include property taxes, depreciation, and loan interest. State tax laws may also contain specific tax code provisions that benefit real estate investors.
Real estate provides important diversification to any investment portfolio. Property is not highly corelated with other investments such as stocks, bonds, and commodities. Real estate can provide stable protection when other investments are losing value.
The consistent income found in most properties also provides great portfolio protection and stability in economic downturns or recessions.
These are just a few of the top reasons why commercial real estate can be such an attractive investment. Many of the largest institutional investors allocate a meaningful portion of their investment funds to commercial real estate. But individuals can also invest in commercial properties to protect their savings and earn sustainable profits over time.
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