Real estate is a fantastic investment opportunity that many people consider a great alternative to stock and bonds. Commercial property is an excellent category of real estate to invest in since it is pretty profitable. According to Nareit, the total size of commercial real estate in America was $16 trillion in 2018. In addition, there are numerous benefits of commercial real estate that make it worth considering when seeking to invest in property. Below are some significant reasons you should consider investing in commercial real estate.
The potential for earning a significant income is perhaps the biggest reason to consider investing in commercial real estate. It is common knowledge that commercial property comes with higher price tags and rents, so there is a higher potential for returns. As such, instead of earning a few hundred dollars on a residential property monthly, you can make thousands, tens of thousands, and even potentially more if you select the suitable properties. In addition, your increased profit margins can help you grow your portfolio quickly, as long as you choose to reinvest your profits.
A more diversified portfolio
Commercial real estate can be an excellent way to diversify your portfolio if you have already invested heavily in residential real estate. However, the year 2020 is a perfect cautionary tale of how you can never tell what will happen to the economy or the world.
Therefore, it is prudent to spread your investments across different assets to reduce your risks. Commercial real estate is notoriously costly, so you will likely have to invest in it as part of a real estate syndication. This arrangement needs the input of trusted syndication attorneys to guarantee fairness and an increased chance of success. It is best to work with these professionals when venturing into commercial real estate portfolios.
Residential real estate is very competitive due to the ease of investing in such properties. On the other hand, your competitors will be less in the commercial real estate industry due to the larger structures and often more money involved. What’s more, commercial real estate has a greater variety of niches compared to residential real estate. As such, the more specific your niche is in this industry, the less competition and more clients you will have.
Turnover is undoubtedly the bane of residential real estate owners. This is because residential properties usually operate on year-long lease agreements, and many renters do not choose to renew. However, unlike single-family rentals and apartments, commercial real estate usually does not operate on one-year lease agreements. Instead, tenants typically sign three-year lease agreements at a minimum. Therefore, the lengthy agreements reduce turnover rates and the stress and costs. In addition, it ensures that your real estate business enjoys a more stable cash flow.
Easier to maintain and improve your property
You will likely not be entirely in charge of maintaining and improving your buildings as a commercial property owner. This reality is because many retail real estate investors operate with a triple net or NNN lease. In these lease agreements, tenants promise to shoulder all the property’s expenses, including maintenance, building insurance, taxes, and utilities.
Therefore, your commercial properties will be much easier to maintain than residential buildings. More, numerous commercial property tenants have vested interests in maintaining the properties compared to residential tenants. In addition, commercial property tenants usually try to impress their clients, so they will be more dedicated to keeping the building in an excellent state. They might even make specific vital improvements to increase your property’s value over time.
Great inflation hedge
It is common knowledge that commercial real estate is an excellent hedge against inflation. Generally, the prices of goods and services increase as the economy grows and people earn more money. Therefore, you can quickly increase the rent you charge as a commercial property owner. Indeed, information from the Federal Reserve Bank of St. Louis revealed that commercial real estate prices shot up by 5% every quarter from 2012 to 2016.
Numerous tax benefits accompany owning commercial real estate. For instance, you can deduct a part of your property’s value from your taxable income annually due to depreciation. Also, 1031 tax-deferred exchanges can help you circumvent capital gains taxes when you sell your property. Instead, you can invest these profits in another property or assets. However, there are several nuances inherent in this strategy, so consider speaking to a tax advisor before adopting it.