Capital investments into real estate are the one commonality that most millionaires add to their portfolio. This is smart and a proven path to creating wealth. Although investment in commercial property can be listed at a higher cost than residential real estate, there is equally a higher return on investment creating passive and stable cash flow. One of many benefits to being a landlord in commercial real estate is most maintenance responsibilities fall back onto the tenant, depending on the type of lease you buy into or establish. We will explore the many reasons why you might consider investing in commercial property.
Cash Flow and Income
Investing in commercial real estate is returned twice; once in the present as monthly cash flow from rental income and again on the asset’s future appreciation. This is unlike other forms of investment, such as bonds that are valued only for their appreciation or stocks that return in a quarterly dividend. A stable and steady source of income is protected from the volatility of stock and bond investments because CRE does not trend the same as financial markets.
The amount of cash flow will depend on the type of rental property and the type of lease. The property can be an office or medical buildings, industrial lots, land, multifamily buildings such as apartments, retail, hotels or special purpose buildings like amusement parks. Different properties require different involvement from their landlord and dictate the level of cash flow the investor will receive. There are three types of leases, called net leases, that determine how involved the landlord must be with the management of the property. On a single net lease, also called an N lease, the tenant pays for their utilities and some property tax, but the landlord is in charge of all other financial and upkeep responsibilities. On a double net lease, or NN lease, the landlord maintains structural upkeep (land and buildings) but the tenant handles maintenance as well as tax and insurance on the property. The best type of lease a landlord can hope for is a triple net lease or NNN lease. With this lease, the tenant is solely responsible for everything regarding the property and the landlord is not involved with any maintenance or financial upkeep. This is the most beneficial lease because it has the highest income with the least involvement.
Appreciation of Assets
As mentioned above, an investment in commercial real estate returns on the potential future appreciation of the asset. This can be caused by an increase in demand in a central location, the higher the demand for property the more money people are willing to pay for it. Appreciation can also be due to improvements and maintenance done by the landlord. If a landlord renovates or improves aspects of the building, they are entitled to ask a higher rental price. Appreciation also happens during inflation; rents go up and that makes the value of the property increase too. CRE generates a higher total return and income than other real estate investments, stocks or bonds.
Long Term Lease
One of the reasons to invest in CRE is because of long term leases. Commercial properties that house businesses will average a three to a ten-year contract. This is unlike most residential leases that expire after a year and leave landlords to find new, reliable tenants on a recurring basis. Even if tenants try to break their lease early, there are still financial penalties tied to cancellations. Long-term leases are beneficial for both landlords and renters because a long-term lease creates a steady stream of income for landlords, without them having to search and do due diligence on new renters and renters have more ground to bargain for a better price per square foot.
Leverage
When investing in commercial real estate, it is usually not purchased with 100% of the cash value upfront. A payment of 20-30% is made by the investors and the rest of the capital is from bank loans. Since CRE has been proven to be a valuable investment that has a greater return than other investments, banks are willing to provide loans. This allows investors to purchase real estate assets that are greater than their cash flow balance. When rent price increases and the value of the property goes up, the investor can resell the CRE asset for a larger sum of money. This means that the return on investment is greater than 100% and this is one of the main reasons to invest in CRE.
Tax Benefits
There are certain tax benefits to owning and investing in commercial real estate. Investors can claim tax deductions for depreciation of the asset and interest expense. The Tax Cuts and Jobs Act (TCJA) is a tax reform that brought new light to tax deferral strategies for CRE investors. It allows for properties bought between September 2017 and December 2022 to be eligible for bonus depreciation. Other tax benefits include loan interest write-offs, lower tax rates for passive activity, and a favorable long-term capital gains rate.
Tangible Asset
Another reason to invest in CRE is that ownership of a property is a hard asset. Both the property and the land it is on have financial value and can be used to create income. Remodeling of the property can further increase the value of the hard asset, making it an even better investment. Hard assets move in the opposite direction of stock markets so CRE can be a stable investment in an otherwise volatile investing market. Ownership of a tangible hard asset also feels good for the investors because it creates security.
Reasons to Invest in CRE
Commercial real estate is the most profitable of real estate investments with a proven track record of high returns. It is not subject to the whims of the stock market because real estate has a strong ever-growing demand. This, along with all the reasons listed above, makes it an attractive opportunity for every investor.
Wildmor Advisors specializes in capital investment sales. We provide curated investment opportunities nationwide. We analyze each properties financial future ensuring that the juice is worth the squeeze. Contact us today to explore potential investment opportunities.
