Thinking about investing in commercial real estate? Great idea! It’s not just for the super-rich. It’s full of chances to make your money work for you. But the question is what are the benefits of commercial real estate investing?
There are hidden benefits of commercial real estate investment that many people don’t know about. This is because most people invest in regular residential real estate because they believe investing in commercial real estate can be complicated and risky.
It is true that commercial real estate can be more complex than residential investments, but today there are many avenues to investing in commercial real estate that make it as easy as residential real estate investment.
Let’s take a look at some of the top benefits of investing in commercial real estate.
What is Commercial Real Estate Anyway?
Commercial real estate is a type of property that’s used for business purposes. It’s not where people live, but where they work, shop, and use services.
This can include office buildings, shopping centers, warehouses, factories, and apartment buildings of five units or more. People invest in commercial real estate to make money.
They can do this by renting out the space to businesses or selling the property for a higher price later on.
One of the big benefits of commercial real estate is that it can provide a steady income. This is because businesses usually sign longer leases than residential renters.
So, if you’re looking for a way to grow your money over time, commercial real estate could be a good option for you.
Understanding How Commercial Real Estate Works
Unlike residential real estate investing, commercial real estate investing is all about buying a property that businesses use.
These include office buildings, shopping centers, warehouses, apartment buildings, etc. Unlike residential real estate, which is leased to individuals or families, commercial real estate is typically leased to businesses.
The process of investing in commercial real estate starts by identifying a suitable property that fits the investor’s goals. The investor then purchases the property, often with a mix of their own capital and borrowed funds.
Once the property is acquired, it can be leased out to businesses. These leases are usually longer-term agreements, providing stability for both the investor and the tenant.
The investor is responsible for managing the property, which includes maintaining the building, addressing tenant concerns, and ensuring the property remains profitable.
One downside of investing in commercial real estate is that it can be more expensive and complex than residential real estate investment.
But the benefits are worth considering, especially for those looking to create a steady income stream through rental payments or capital gains from selling for a higher price later on.
In essence, commercial real estate works as a bridge connecting investors and businesses needing a physical location to operate.
Different Types of Commercial Real Estate
Commercial real estate properties are mainly divided into 4 categories:
- Office space
- Industrial use
- Multifamily rental
- Retail
1. Office Space
As the name suggests, office space includes buildings used for offices, research centers, and other professional services.
These properties are typically leased by companies that need physical spaces to operate their businesses. Investing in office space can be lucrative as the tenants often sign longer leases than residential tenants.
Office spaces can be further classified into three categories:
Class A Buildings: These are modern office spaces with the highest quality amenities. This will be the costliest one as it mainly focuses on aesthetics, quality, location, and prestige.
Class B Buildings: These are middle-grade office spaces that offer average amenities. It is an ideal option for small business owners as it offers a good balance between quality and cost.
Class C Buildings: These buildings lack the modern amenities of Class A or B buildings but are still suitable for tenants who can’t afford to rent space at higher price points.
2. Industrial Use
When it comes to industrial use, this refers to commercial real estate used for manufacturing and storage purposes.
This type of property is leased by companies that need large warehouses, distribution centers, and other facilities to operate.
Industrial properties are located in suburban or rural areas where businesses can have their own private space without interruptions from other activities.
Investing in industrial use can be profitable as the tenants typically sign longer leases than in other commercial real estate categories.
3. Multifamily Rental
Multifamily rental properties are residential buildings that have five or more units and are rented out to tenants. This basically means that the building is divided into multiple apartments or units, each with its own separate entrance.
These properties are a great option for investors as they can generate stable cash flow in the form of rental payments from tenants. Multifamily rental investments also have tax and financing advantages over other types of commercial real estate investments.
4. Retail
Retail properties are the most popular among investors because they are the easiest to understand. This type of commercial real estate includes strip malls, shopping centers, and other retail locations.
These properties can be leased by different types of businesses such as restaurants, clothing stores, grocery stores, pharmacies, etc.
Investing in retail allows investors to generate an income through rental payments and capital appreciation when selling for a higher price later on.
Top 5 Benefits of Commercial Real Estate Investing
So now that we know one or two things about commercial real estate, let’s take a look at some of the benefits of commercial real estate:
1. Steady Income
The steady income from commercial real estate comes from the rent paid by tenants. Businesses that lease your properties pay you a set amount each month. This is often more reliable than other types of investments which might fluctuate more with market conditions.
Plus, commercial leases are typically longer than residential ones – often several years – which means you have a guaranteed income for that period. This can provide a stable, regular cash flow.
So, if you’re looking for an investment that provides consistent income, commercial real estate could be a good choice.
2. Appreciation Potential
Appreciation potential is a significant benefit of investing in commercial real estate.
This means that over time, the value of the property can increase due to various factors like market conditions, improvements to the property, and the development of the surrounding area.
When you decide to sell the property, this increased value (or ‘capital appreciation’) can result in substantial profits. This is especially beneficial if the property significantly appreciates during your ownership.
Therefore, aside from the regular income from rent, the possibility of selling the property at a higher price later adds an extra layer of potential return on your investment.
3. Diversification
Diversification is a key strategy in investing, aimed at spreading risk across various types of investments. By adding commercial real estate to your portfolio, you introduce a different type of asset – one that isn’t directly correlated with stock or bond markets.
This means when other investments are performing poorly, your real estate assets may still hold steady or even increase, balancing out potential losses.
Additionally, returns from commercial real estate, through rents and property value appreciation, can potentially enhance your overall investment returns.
Therefore, commercial real estate can be a valuable tool for diversification, reducing risk, and boosting potential returns.
4. Tax Benefits
Investing in commercial real estate comes with several tax benefits that can significantly reduce your tax liability. For instance, the IRS allows investors to deduct expenses related to owning, operating, and managing a property.
This includes mortgage interest, insurance, maintenance costs, and property taxes. Moreover, real estate investors can benefit from depreciation, a non-cash expense that reduces taxable income.
Essentially, it acknowledges the gradual wear and tear of the property over time. By taking advantage of these tax deductions and depreciations, you can effectively lower your overall tax burden, making commercial real estate investing an attractive venture.
5. Inflation Hedge
Commercial real estate can serve as an effective hedge against inflation. As the cost of living increases, so does the value of real estate properties and the rent that can be charged.
This means your investment grows in line with or sometimes even faster than inflation. While other investments may lose value in real terms during inflationary periods, commercial real estate often sees a corresponding increase in both rental income and property value.
This allows investors to maintain their purchasing power and protect their investment returns from being eroded by inflation, making it a beneficial addition to any diversified investment portfolio.
What Are The Downsides of Investing in Commercial Real Estate?
As we all know everything good comes with a price and so does commercial real estate. While the benefits of investing in commercial real estate are considerable, there are some downsides to consider before taking the plunge.
1. High Initial Investment
The most obvious downside is that investing in commercial real estate requires a significant initial investment. Commercial properties tend to be much more expensive than residential ones and require a larger down payment to qualify for financing.
Plus, it can be difficult to qualify for a loan if you don’t have a good credit score or reliable income. Therefore, investors must have substantial capital and resources before investing in commercial real estate.
2. Long Tenancy Cycles
Commercial tenants tend to stay in properties for much longer than residential ones due to the length of their lease agreements. This can be both a blessing and a curse.
On the one hand, it means you don’t have to worry about finding new tenants as often. On the other, if your tenant decides to move out early or stops paying rent, you may have difficulty filling their space again quickly.
Plus, in case of an emergency, you can’t just show up and evict the tenant. You’ll need to go through a legal process that can be lengthy and costly.
3. Expense and Maintenance Requirements
Just like any other type of property, commercial real estate requires regular maintenance and upkeep. As the owner, you have to pay for any repairs or renovations that need to be done. This can quickly add up in costs over time.
Plus, since many commercial properties are used by multiple tenants, you’ll need to coordinate with them when it comes to making repairs or improvements. This can be time-consuming and add to the overall expense of owning a commercial property.
4. Complicated Terms and Conditions
Commercial real estate transactions tend to be much more complicated than residential ones. The contracts, terms, and conditions are often complex and require specialized knowledge or a lawyer’s help.
Plus, the leasing process is often lengthy and can involve negotiation between you and your tenants over rent amount, space requirements, usage rights, etc.
This makes it important for investors to have a good understanding of the legal process before taking on commercial property.
Top Tips to Succeed in Commercial Real Estate Investing
If you are serious about getting into commercial real estate investing, here are some tips to help you succeed:
1. Research Research Research
The best way to start your journey of real estate investing is to do a lot of research before committing to anything. Learn as much as you can about the industry, local market trends, and investment opportunities in your area.
It’s important to know what type of property you’re looking for, how long it will take for the investment to pay off, and which financing options are available to you.
2. Get the Right Team
Investing in commercial real estate is a complex process, so it’s important to build a team of professionals that you can trust. This includes agents, lawyers, accountants, property managers, and contractors who will help make your investment successful.
It’s also important to have an experienced mentor who can provide you with advice and guidance as you navigate the market.
3. Start Small
Though it’s tempting to go big right away, it’s important to start small and gradually increase your investments. This will help reduce risk while still allowing you to build up experience in commercial real estate investing.
4. Find a Trustworthy Partner
Partnering up with another investor can help reduce financial strain and bring in more expertise. Before you do this, make sure to thoroughly vet any potential partners and find someone who is reliable and trustworthy.
5. Be Patient
It takes time for commercial real estate investments to pay off, so it’s important to be patient and not expect quick returns on your investment. Establishing a longer-term plan and having realistic expectations for returns can help you stay the course even when things get tough.
Conclusion
So there you have it! Now you know the benefits of commercial real estate investing. As you can see there are both pros and cons of investing in a commercial property, so it’s important to weigh them carefully before making any decisions. It’s also essential that you do your research and find the right team of professionals to help you manage your investment portfolio. With the right approach and strategy, commercial real estate can be a great addition to your financial portfolio. Good luck!
