Updated: Apr 28, 2020
Real Estate investing, specifically commercial real estate investing, has proven to be one of the best vehicles for savvy wealth-builders to create real prosperity over time. In fact, most affluent individuals typically own a significant amount of real estate in their portfolio due to the incredible benefits that real estate offers over stocks, bonds, and other avenues. Consider just a few of the many reasons to invest in commercial real estate below:
The Tax Code Favors Real Estate Investing
Both residential and commercial real estate investors can benefit from the United States Government tax code. For starters, IRS rules allow property owners to take deductions against the cost of any improved property used for business purposes in a given piece of real estate, even if they've used borrowed money for the majority of the asset. This is called depreciation. So, while a property's cash-flow may be taxable, the investor can legally deduct the depreciation from their investment against that cash flow every year. Ongoing improvements are also deductible.
Furthermore, any interest an investor may be paying for the cost of borrowed money is also deductible. So, while you may be earning an income from your investment, you can actually report a loss, and carry those losses from year to year.
Another tool that makes real estate unique is the ability for the average person to borrow much of their initial investment. While most good real estate holdings will provide an annual return on their own, the power of borrowing can significantly increase your yield. Imagine if you were to acquire a property for a million dollars, and that property realized an annual profit (net operating income) of, say $100,000. This means that the annual yield (also known as the capitalization rate) would be 10%.
However, if you borrowed 75%, or $750,000 of that investment, your own cash investment return (also known as your cash on cash return) of $250,000 would have yielded you a whopping 40% per year!
While the US government will allow you to depreciate your property over time, the actual value of real property appreciates during the same period. So, while you're realizing the tax benefits from depreciation, and your tenants are paying for the cost of your mortgage, and you're benefiting from the deduction of interest for that mortgage, your property is actually increasing in value.
Commercial real estate investments are certainly less volatile than stocks, and they typically yield much better returns than bonds. In addition, one can further insulate themselves from the ebbs and flows in the market with smart value-add selections, economies of scale, and of course, the guidance of a competent advisor.
Generally, any investment that is used solely for business purposes is considered investment real estate, even if that investment is a residential dwelling. However, multifamily properties help to spread out the risk as opposed to single family homes. If a tenant unexpectedly moves out, a single family home investor will lose out on 100% of his income. However, when a tenant moves out of a multifamily unit, there are still other tenants to provide a stable income until a new tenant is found.
In addition, other commercial real estate investments such as office buildings, warehouses, and retail centers attract long-term tenants that are more reliable and lower maintenance. You can count on these tenants to pay their rent on a timely basis, and keep the relationship positive for a long time. Commercial leases can last anywhere from 5-10 years!
Less competition than single-family
To the benefit of brave commercial investors everywhere, you will find that the commercial real estate market is the far less competitive than its residential counterpart. With property values exceeding of one million dollars, you will face far less competition, and a generally more sophisticated seller. Work this to your advantage, and partner with an experienced commercial real estate advisor.
How to Get Started with Commercial Real Estate Investing
The first step in getting started with your real estate investment is finding the proper advisor. With the proper coaching and support, commercial real estate investment can be a passive way to grow your wealth, and diversify your portfolio. Our professional team at Sperry Commercial - Flint Brokers & Associates guides our clients through the process of acquiring, and managing their commercial real estate assets, to maximize their return on investment. Our team is trained, and well versed in market trends, and will closely watch the area to find the ideal property for you.