Why Invest in Commercial Real Estate?
Any good investor knows investment opportunities are not a one-hit-wonder. Investments involve both risk and reward. This balance must be considered every time investments are made and especially when you invest in Commercial Real Estate.
So, it is important to have a diverse investment portfolio. If an investment fails, the investor can reap the benefits from a different investment and make up his losses. This diversification extends to investment options like stocks, bonds, and CREs (Commercial Real Estate).
Commercial real estate is a desirable investment opportunity due to its stable nature. Regardless of fluctuations in the market, investing in commercial real estate brings promising cash flow and asset appreciation. Investors who are proficient in asset management and are not looking for a short term financial gain can opt for such an investment process. Once purchased, commercial real estate can become an extremely lucrative and stable source of income for the distinct future.
The following are the reasons why one should invest in commercial real estate:
Bringing Diversification in an Investment Portfolio
As state before, every investment comes with a certain degree of risk. The best way to combat this risk is to have a diverse assortment of investments. This will allow the investor to compensate for any loss he or she might have encountered with other investment avenues. Investment in commercial real estate offers stability in the sense that there is no high risk. If the investor can afford commercial real estate, it can be easily turned into a lucrative income source. Commercial real estate investment can act as a long term safety net against other investments with a higher risk factor.
Long-term Cash Flow Stability:
A common trope for commercial real estate is long-term rental agreements. Owners of commercial real estate’s lease the property to tenants on rent. The tenure for these leases is generally for 3 to 5 years. This allows for constant cash inflow for that period without any further expenses. This makes commercial real estate an excellent option for reducing cash flow volatility in the long run. Commercial real estate investment has also shown to be less volatile than standard investments in stocks. Short term events less impact real estate investment as they are publicly traded, allowing evening out of valuations.
Creating a Hedge Against Inflation:
The economy often undergoes inflation. In such a situation the price of buying goods and services goes up. By investing in commercial real estate, investors can benefit from inflation in the economy. During inflation, the number of wages paid and profit also increases. This allows real estate owners to charge more for the use of their property. Due to the increase in pay scale, the tenants of the estate will also have no issue paying the increased charge. By having the commercial real estate rates increase at a slightly higher rate than the inflation itself, property owners can create an inflation hedge that adds to the already existing organic growth.
Limited Working Hours:
With the lease if a real estate, there is not much to keep track of business-wise. Apart from the collection of rent and the occasional need for checkup and maintenances, owners of the leased properties need to burn the midnight oil. Most commercial properties that have been leased will at most be at the risk of a break-in or any damages caused by the tenants themselves or a natural disaster. This boils down the day’s tasks on managing the different properties during the day. The business for the owner ends with the occupants’ business when it comes to commercial real estate.
Brings Tangibility to the investment:
When investing in commercial real estate property, the assets involved are tangible. This means that the investor can physically touch and see the assets. This allows the investor to evaluate the property for themselves. For many, this offers a degree of security over investing in nontangible assets like shares, bonds, and stocks. By having a tangible property, the owner can still use the land for sale or restructure the property if damage occurs. Evaluation of the physical aspects of the property itself, such as its overall condition, the locality the property is situated in.
The most significant incentive for investing in commercial real estate is the massive tax benefits. In the case of investment in stocks and bonds, it is very difficult to save on taxes unless it is for retirement purposes. On the other hand, owning commercial real estate can help save up on taxes in multiple ways. With time, it is expected that the value of the property will rise. But owners of commercial real estate can depreciate the value of the property. By doing this, a lot of tax can be saved on income. If the owner can appropriately structure the commercial real estate, he or she can claim tax deductions based on interest expenses, depreciation of the buildings, and others.
Remodeling Hard Assets:
Unlike digital assets like bonds and stock that can disappear in a single day, hard assets like real assets retain more permanence. Being a hard asset, commercial real estate retains intrinsic value for the building and the land it is built. Real estate can be used to develop other goods and products. This organically increases the value of the property itself. This remodeling can help increase the price of commercial real estate. The owner of the property can further maximize the benefits by increasing the max occupancy.
Investing in commercial real estate is an endeavor that is purely long term. Potential investors should keep in mind that opting for such an investment is a capital intensive process. But, is a person can afford to invest in these assets, then the payoff, in the long run, will be a beneficial one if managed correctly. This makes commercial real estate investment options looking for a long term income source rather than an immediate and short term one.
Investing in CRE FAQ's:
CRE lending is the acquisition of the necessary mortgages and similar financing of the property by the buyer in order to purchase the real estate property.
It is not necessary for a buyer to have a broker with them when seeing the property. Although having a broker will allow the buyer to view more and have access to the entire property for judgement as opposed to the restricted access if he or she were to go alone.
The value of the commercial real estate is calculated by price per square feet of the land each month or year.
After purchase of a CRE, any changes that will or can be made can either be borne by the tenants or the landlord. This is up to the owner and the tenant to negotiate and come to an understanding.
CAM charges are all the Triple Net charges like taxation , maintenance and insurance of the CRE.