Stocks and bonds provide great investment opportunities, but nothing as diverse and financially promising as commercial real estate (CRE). These are tangible investments requiring commitment and expertise, but it is one of the best portfolio additions any investor can consider.
Commercial real estate investments provide various benefits, including tax benefits, tangibility, leverage, and an inflation hedge. CRE has some negative aspects, but if maintained and managed properly, it will provide a steady income and exceptional return on investment.
Purchasing CRE is wise if you have all the information necessary to make an informed decision. Nothing comes without risks, and CRE is no different, but with commitment, determination, and the right information, it is a great investment opportunity.
Why Invest In Commercial Real Estate
There are several reasons why investing in CRE is a smart move for serious investors. Before you commit to investing, you must seek the advice of a professional financial advisor or estate agent to guide you through the process and show you the risks and benefits involved.
Here are some reasons why investing in CRE is a good idea:
- It can provide a good income, for example, through rental payments.
- The value increases over time with the rise of property values.
- These investments provide several tax benefits.
- Commercial property is an excellent way to diversify your portfolio.
You must do proper research before investing in CRE. Professional assistance, patience, and a good strategy is why it is one of the best ways to increase your wealth and build a long-term revenue stream. So far, commercial property is the perfect investment option, but you must also know there are risks and negative factors.
Positive Motives For Investing In Commercial Real Estate
Before investing in commercial property, you must look at the big picture and consider all the aspects, especially the benefits. Here are six reasons why you should invest in CRE:
It Provides Several Tax Benefits
Including CRE in your investment portfolio can offer various tax advantages:
- Interest expense – Interest payments made annually as part of your mortgage payment are deductible from the tax the business owes.
- Depreciation expense – When you buy a building, it depreciates, and the IRS allows a tax reduction for CRE over 39 years.
- Post-sales tax savings – If the CRE is left to beneficiaries and they sell it, they will only pay tax on the increased value after your death.
- Non-mortgage-related expenses – Maintenance, renovations, upgrades, and other costs associated with the commercial property are also potentially tax deductible.
- Capital gains – Some CRE investors create an asset for a retirement benefit, and a lower capital gains tax rate is a better option than an IRA retirement investment.
It Can Be Used As An Inflation Hedge
One of the benefits of owning CRE is that it can impact and offset inflation in the long term. CREs adjust rent to keep up with inflation, producing strong economic growth.
It Produces A Steady Income and Cash Flow
Owning CRE has many benefits, and its ability to provide steady revenue sets it apart from other investments like stocks and bonds. A stable income protects an investor against volatile financial markets and provides diverse possibilities.
Commercial Real Estate Can Be Used To Leverage
Generally, a large portion of commercial property is financed over several years and paid back monthly, increasing an investor’s leverage. Leverage allows an investor to achieve higher gains than other asset types.
It Produces Good Returns
The high percentage return on investment makes CRE so attractive, causing investors to consider it as a viable opportunity. Studies show that stocks produce a 3% annual return on investment while a CRE investment produces upwards of 10% yearly.
Commercial Real Estate Is A Tangible Asset
Investing in something you cannot see or touch is one of the hardest things. Commercial property is tangible; investors can visit and experience their investment while physically experiencing its possibilities. Assessing the condition, location, and other aspects of the CRE provides peace of mind, adding some confidence in your investment.
Other benefits include that the land does not depreciate, and even if something happens to the structure, the land provides some form of guarantee whether you sell it or build a new structure. If properly maintained and managed over an extended period, CRE can yield income for a considerable amount of time.
Negative Aspects Of Investing In Commercial Real Estate
Commercial property attracts investors with its many benefits and profitability, but there are also negative aspects to consider. Here are four negative aspects to watch out for when investing in CRE:
It Requires A Big initial investment
A CRE investment requires large capital, even if mortgaged, and the initial cost can be extensive. Financiers generally require a large deposit, plus you must consider other expenses like:
- Repairs
- Maintenance
- Upgrades
- Loss of income (rent payments, unoccupied spaces, and unforeseen expenses)
It Has Liability Risks
Commercial properties are open to the public and visitors, which opens the liability to injury and property damage. Although accidents happen everywhere, CRE isn’t immune to these risks, and you must consider the potential cost if such an event occurs.
It Requires Professional Assistance
Many things can go wrong at a commercial property, like plumbing, electricity, and various other factors, which often require the expertise of a professional. Keeping up with all the various maintenance tasks also requires the hand of someone well-versed in all the complexities.
Some CRE’s require a property manager or property managing firm to handle the maintenance, lease administration, and occupant queries. Property management companies are expensive and charge between 5% and 10% of the rent revenue to oversee everything.
Its Demands Time Commitment
Owning CRE is a complex business, and with the maintenance, tenants, and other operational factors, you must be hands-on, which requires commitment. Between the daily tasks, public safety concerns, and tenant queries, being absent will result in a loss of income. Managing a successful CRE investment is a 24/7 commitment that requires a hands-on approach.
Conclusion
Investors seeking a diverse portfolio must include CRE to experience all its benefits. It yields a great investment return if maintained and managed properly. You get several financial benefits from a CRE, but there are also negative factors to consider before investing.