1. Why Invest in a Commercial Real Estate?
Risk has always been a cornerstone of investment. Many investors think of having a flourishing investment portfolio. But one often finds the hackneyed terms of investments like stocks, bonds, ETFs, Mutual Funds, and others. This trend of investment recurs because there is a feeling of security and stability involved in these options. But in reality, there is an element of risk involved in these too.
Why not think of investing in Commercial Real Estate? After-all the best investment on earth is earth.
Adding real estate to your investment portfolio will give the much-needed edge. Commercial real estate is considered to be a hard asset with a scarce resource. It has an innate value, and its value appreciates over time.
Investing in Commercial real estate (CRE) can yield benefits like a new source of cash flow, potential long-term appreciation, and proper diversification of the investment portfolio. Let us try balancing our investments as someone has said – don’t put all your eggs in one basket.
CRE investments are financially more lucrative, offering more financial gains as against residential properties. Let us paint a broad picture by looking at the advantages of investing in Commercial Real estate.
A potential Source of Income:
The earning potential for investment in CRE is much more. If you look at the figures, then the commercial property usually has an excellent annual return on the purchase price depending on the area.
Investment in CRE can garner robust predictable returns over the period by way of rents and high occupancies, ensuring a monthly to yearly incomes, thus adding stability to the investment portfolio.
Regular and Consistent Returns:
The lease for any commercial property is for long term, a minimum of five years. The owner of the commercial property has an assurance of consistency of returns. Also, lease agreements come with a clause of yearly appreciation of the rental value irrespective of market value making it more attractive.
Choice of Tenants:
CRE, with an excellent location, invites tenants like banks, corporates, business houses, or retail shop chains. Dealing with corporates is always advantageous as there are no hassles towards daily operations as well as a chase for rent. Quality tenants attract other such tenants creating a ripple effect and thus ensuring better yields in future.
Zero Furnishing Cost:
One of the critical advantages of having a CRE investment is zero furnishing cost of the property. The investor can hand over the property to the corporate tenant who can furnish the property as per their own choice or taste. The reason behind this is branding, which is essential in a commercial space. Moreover, every corporate has its guideline to set up a proper infrastructure at the property they occupy.
Breaking Free From Parallel Earnings:
Earning from any particular source of investment may tend to become positive or negative if there is some fluctuation in the financial markets. Whereas, investment in CRE is not influenced by the performance of any other source of investment. Investment in CRE has no relation whatsoever to any changes in the stock or bond markets.
A Concrete Physical Asset:
Many people believe that real estate is more physical and tangible because you can touch, see, and feel it. In contrast, stocks, bonds, ETFs, and other sources of investments may not be as a feeling appealing for some people as they can’t trust them. A property can be visited to gain more insight into its location, size, area, condition, and other factors that may play an integral role in its earnings. In case if there is some damage to the structure created on the invested property, then the land is still available for future use.
An investment in CRE can very well have its share of tax benefits by reducing or eliminating some capital gains. For tax purposes, a depreciation in the value of buildings over time can help reduce the yearly taxable income. An investor is depreciating his property for tax purposes while appreciating the same for investment. Thus making it a unique feature of investment in CRE.
While other investments such as stocks, bonds, or mutual funds bring in diminishing returns during a boom, investment in CRE can easily avoid the long-term impact of inflation. This impact can be avoided because property rents can be very well-adjusted during inflation due to robust economic growth.
Should everybody invest in commercial real estate? Is it favorable for everybody? The answer to this question is a personal attribute. But we have seen the many benefits of investment in CRE. The investment can be advantageous in comparison to the investment in residential real estate, but it can get a little trickier as well. Good quality leased estates at emerging locations will attract good quality tenants and more returns in future. However, though the investment in CRE is extremely rewarding, it requires a lot of patience and comes with more risks.