There are numerous investment opportunities in real estate. However, the most established method of obtaining a high return of investment is through commercial real estate. Commercial real estate is defined by its ability to generate some of the highest income streams.
Commercial real estate generates revenue from the property’s cash flow, regardless of whether it is sold through income funds. The allure of investing in this type of property is multifold. By investing in a variety of asset classes or property types, investors can increase their investment returns and benefit from tax advantages.
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What is a Commercial Property?
Commercial real estate (CRE) is a property that is used primarily for business purposes or to provide a workspace, as opposed to residential real estate, which is used for residential purposes.
Commercial property is most commonly used to refer to buildings that house businesses, but it can also refer to land that is used to generate revenue or to large residential rental properties. It might refer to office buildings, warehouses, industrial buildings, retail buildings, apartment buildings, and more.
Investing in commercial real estate involves purchasing properties such as office buildings, multifamily apartment buildings, hotels, shopping centers, malls, and storage facilities among other types of properties.
Is Commercial Real Estate a Lucrative investment?
Commercial real estate investing can be lucrative and act as a hedge against the stock market’s volatility. While investors can profit from property appreciation when they sell, the majority of their returns come from tenant rents.
Real estate as an asset class has the potential to be a good investment in the long run. If you’re interested in this type of investment, you must be committed to having the commercial real estate holding invested for the long term.
Commercial property investors can also take advantage of the triple net lease, in which the company leasing the premises assumes responsibility for real estate taxes, building insurance, and maintenance. This advantage is not available to investors in residential real estate.
Given the illiquid nature of the commercial real estate, your money may be locked up for an extended period. Although illiquid investments typically earn higher returns over time and are not subject to daily price volatility, certain opportunities may have a higher entry barrier.
In direct investments, owners of the physical property can earn by becoming landlords. The best candidates for direct investment in commercial real estate are either those who have considerable knowledge of the industry or are capable of hiring consultants with that knowledge.
Commercial properties are extremely risky, but highly rewarding investments. CRE investing requires a significant amount of capital, so such an investor is likely to be high-net-worth.
Another way to invest in the commercial market is through the ownership of various market securities, such as real estate investment trusts (REITs) or exchange-traded funds (ETFs) that invest in commercial property-related stocks, or by investing in companies that serve the commercial real estate market, such as banks and realtors.
Benefits of Commercial Real Estate
Commercial real estate investment comes with many rewards. Commercial real estate offers attractive leasing rates as one of its biggest advantages. When the amount of new construction is limited either by land or by law, commercial real estate can generate impressive returns and substantial cash flows each month. Office towers have higher overhead costs, while industrial buildings usually rent at a lower rate.
As the value of real estate depreciates over time, a tax code allows commercial property owners to deduct the depreciation in their taxable income. Property improvements are compensated by this, so the investor or property owner can address wear and tear over time.
The 1031 exchange is also a reward that comes with commercial real estate investing, which allows capital gains to be deferred. In most cases, selling investment results in capital gains tax, but a 1031 exchange allows investors to defer capital gains tax when selling a property and use the funds from selling it to purchase another investment property.
How to Invest in Commercial Property
It is imperative that you understand the complex market factors at play, the unique financing requirements, property management options, and lease arrangements to invest in commercial property successfully.
Commercial real estate investment usually involves an investment amount that is beyond the ability of a single retail investor to provide. Investing in commercial real estate is most commonly done through real estate investment trusts or fractional ownership.
In order to understand how to invest in commercial real estate, it’s important to understand what types of commercial properties exist. By doing so, you can start thinking about which type of commercial asset you want to specialize in.
- Special Purpose
Regardless of your sector or niche, you must do your homework and pay attention to your due diligence in order to achieve success in real estate. Make sure you understand the ins and outs of commercial investing, as well as how it differs from residential real estate.
No matter where you invest, location matters, and this holds true for commercial investing as well. You should also consider your tenants when you invest in commercial properties. When it comes to determining demand, location and intended tenant type are closely related.
Having a clear understanding of these factors should help you select a retail, industrial, or office investment property that will succeed. The following considerations apply equally to large and small commercial property and will help to identify suitable locations and opportunities for investment.
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President of Saint Investment Group
Nic is a two decade seasoned expert in investing and capital raising, specializing in Real Estate and debt markets. With Saint Investment Group, he leads large-scale distressed asset purchases and innovative syndications for investors.