The income potential is unbeatable
Table of Contents
- The income potential is unbeatable
- Investors earn regular cash flow
- You add tangible assets to your portfolio
- You can pay down the principal and build equity faster
- Depreciation is not a complete loss
- You can cash in on capital gains
- Triple net lease options cut your liabilities
- Commercial tenants tend to be more conscientious
- You receive a fairer price evaluation
The main reason why people invest in commercial real estate is the attractive and regular income. As a rule, most commercial properties yield an annual return between six and 12 percent off the purchase price. The percentage depends on the area. In comparison, a single-family residential investment may yield up to four percent at best.
When compared to stocks, bonds and even commodities such as gold, real estate yields are attractive. In 2015, the NCREIF reported an average annual return of over 12 percent, and the average during the last 15 years was over eight percent. This is 200 basis points over the S&P 500 average performance during the same time frame.
Investors earn regular cash flow
If you do not own an entire commercial real estate property, you can still be a partial owner with other investors. You have two main options in this case, which include equity investment and debt investment. Rising rents and high occupancy rates mean steady and increasing cash flow over time. This is equity investing. Debt investing refers to becoming part of a loan. These loans have hard assets, such as real property or buildings as collateral. Debt investments typically yield fixed returns in this case.
You add tangible assets to your portfolio
Diversifying your portfolio with hard assets is always beneficial. Enron was a good example of why relying only on what appears to be a strong company is not a good idea. Although some companies may be going strong one day, they could be closing up shop the next. Commercial real estate will always be there. You may still have to deal with depreciation, extensive damages and other financial issues; however, property values always remain the same even if they fluctuate.
You can pay down the principal and build equity faster
If you have a fully amortizing loan, you can reduce monthly payments by paying extra. This task is easier to do with commercial real estate since you have regular rental income from business tenants. Also, this reduces your risk. Paying down the principal is a good way to strengthen return certainty.
Depreciation is not a complete loss
While every real estate owner must deal with depreciation issues, it is important to remember that depreciation does not affect the market value even if physical structures are reduced. With the straight=line accounting method, structures and improvements may depreciate over a period of 27.5 years.
Other items, such as flooring, may depreciate faster; however, there is a silver lining. You can write off a passive loss of depreciating assets. Tax benefits are based on income, which means that working with a tax adviser is essential. Also, there are generous credits for most upgrades that save on energy.
You can cash in on capital gains
With equity investments, you can increase your return when you sell a property that has appreciated in value. Developing an ideal exit strategy is necessary to successfully do this. Many real estate investors are able to buy a commercial property in a growing area, fix it up and then sell it for a nice profit. Strategies that depend more on cash flow may take a few more years to complete.
Triple net lease options cut your liabilities
You will always need insurance and have to pay your mortgage. Most people who are new to real estate investing assume that property damages and upkeep expenses are always the landlord’s responsibility as it is with residential real estate, but commercial real estate gives you the possibility of triple net leases, which pass on the majority of expenses to tenants. They pay real estate taxes, upkeep and several other costs. This means that the only major expense for you is the mortgage.
With higher rents and increased occupancy, you can pay the mortgage down faster in many cases. Several large companies, such as Starbucks and CVS, use triple net leases. If you are willing to work with larger businesses, this is a great savings and income tool; however, triple net leases are not typically used with smaller businesses. Keep these considerations in mind when seeking tenants.
Commercial tenants tend to be more conscientious
If you know someone who owns residential property, you have probably heard the landlord woes of tenants who refuse to pay, damage the property and create expensive problems through negligence. Since business owners rent commercial spaces, they are more concerned about keeping their space clean and maintained. They know that everything from peeling paint to annoying pests can damage their reputation, and that is bad for business.
You receive a fairer price evaluation
With residential investments, you have the issue of emotional pricing. A person may try to sell a home or property for a higher value because of an emotional attachment. With commercial real estate, you can simply request the current owner’s income statement. This will help you see what price to expect. Asking prices for commercial properties are typically set using a prevailing cap rate in the area for that specific type of space whether it is industrial, office, retail or another classification.
These are just a few of the many good reasons to invest in commercial real estate. With the recent volatility of Wall Street, investors everywhere are seeing the importance of making smart, long-term investments. The ever-increasing growth of China may continue to impact the global economy and large companies everywhere, but investors are starting to see commercial real estate as a haven for their money. While it is also important to consider the cons, the pros outweigh the negatives, such as insurance risks and heftier time commitments, when it comes to commercial real estate investing.
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