Countless people have found success investing in residential real estate over the years, and often several factors precede such a decision, including appreciation, supply and demand, plus return on investment. Similarly, commercial real estate investing takes these variables into account and offers the potential for higher returns. Many real estate investment experts see current market conditions as an ideal time to start investing in commercial property and land.
Perhaps the most obvious reason people consider any type of real estate investment is to make a profit. Commercial building owners have several advantages they can take advantage of to help ensure appreciation. First, business appreciation is only taxed when it is sold, allowing the owner to take advantage of certain tax laws. Additionally, since commercial property owners can complete a 1031 exchange and avoid paying taxes when the property is sold, as long as there is an ongoing investment in the real estate, the gains are protected on the sale. Third, there are a number of things a commercial property owner can do to increase value, such as increasing tenant rent or lowering operating costs. Finally, by taking advantage of a triple net lease, commercial property investors can often get tenants to pay for building maintenance costs.
Too often, residential homeowners find themselves paying off part of their mortgage due to a default on a tenant (usually the only one) or due to excessive maintenance costs. However, with commercial properties this rarely happens. The reason for this is that most commercial real estate loans are tied to what is known as a debt service coverage ratio. This ratio requires that a property’s net operating income be higher than loan payments, ensuring both security for the bank and profit for the owner.
Another attractive feature of investing in commercial real estate is that it allows you to diversify your risk (a key investment tip worth keeping in mind). Suppose you own a mall with space for 10 tenants and all the spaces are rented, if one of the businesses goes bankrupt, the mall owner will only lose one tenth of the income from him. If that same investor owned a single-family home and his tenant moved out, that investor would lose his entire source of income from that property.
Commercial real estate is a huge barrier against inflation; allowing the investor to actually make money. One of the reasons is that the rent increases with inflation and so does the value of the property. If, for example, the rent goes up, the value of the property correlates. Inflation also raises the construction costs of new properties.
Investing in commercial property provides the investor with a long-term source of income and many tax benefits. It also allows for greater protection in light of diversification and allows inflation to benefit the investor. Considered by most to be a solid and safe type of investment, investors should consider adding commercial real estate to their portfolios.
