Why You Should Consider Commercial Real Estate as Your Next Investment This article highlights the benefits of investing in commercial real estate while also addressing the associated risks you should consider.
By Erica Dushey Sarway Edited by Chelsea Brown
Key Takeaways
- Commercial real estate offers passive income, tax advantages and steady cash flow, making it a valuable investment option.
- Investing in commercial properties can diversify your portfolio and serve as a hedge against inflation, offering stability in uncertain economic times.
- However, commercial real estate requires significant time and capital investment, as managing properties can be costly and requires outside help. So, it's important to weight the risks and rewards carefully.
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Real estate is one of the biggest industries in today's world. From buying property as an investment to buying your own home, real estate impacts every person's life in one way or another. Although it's a beast of an industry, you do not necessarily have to work in real estate to invest in it. In fact, many people buy properties simply to make a passive income with no intention of making it their full-time job.
Here are some reasons why commercial real estate could be a great investment for you.
Related: Tap Into the Wealth Potential of Commercial Real Estate With These 5 Tips
Passive income
By investing in a property, you are going to be able to make a passive income — a check you don't have to actively work for. Depending on the property you buy, you can rent out the space to tenants and get paid each month that they occupy the building. In turn, the income can be recycled to pay for the property and its expenses or be used to invest in other properties without having to touch other funds. This is great because this is monthly income that you do not have to actively work for.
Tax advantages
By investing in real estate, there are many deductions and breaks that can actually help when it comes to paying your taxes. Also, any money you make on the sale of the property will be seen as capital gains and not an income, therefore lowering the amount of taxes you would have to pay on that money.
Cash flow
As you rent out the property and the tenants pay their rent, you will create a steady cash flow for yourself and increase your own income. As the mortgage gets paid, this will also help build your equity, which can help you invest in more properties and build up overall wealth.
Diversification
When investing money, it is always good to invest in different types of assets to ensure you have stable and reliable returns. Commercial real estate can diversify a portfolio — and in case of a market crash, properties remain unaffected, whereas stocks and bonds plummet. It's also a tangible asset that you can touch and feel, unlike other forms of investments. Tangible assets can help minimize the total risk in investments and help you build a profitable portfolio.
Related: 6 Key Questions You Should Always Ask Before Investing in a Commercial Real-Estate Property
Leverage
Most times, buying a piece of real estate requires an initial cash investment. That investment can gain a very high return that can completely cover the debts of the property. For example, if you pay a down payment of 20% and the other 80% is debt, the property only needs to appreciate 20% for the invested equity to be 100%. However, this comes with the risk that if the property does not become profitable, it may have to go into foreclosure if the monthly payments cannot be made.
Appreciation
Real estate investments offer a lot of potential growth and appreciation that you may not have in more classic avenues of investing. For example, an investor can choose to buy and develop a property in an area they believe is up-and-coming. In that case, as the popularity of the neighborhood increases, the value of their property significantly rises and can lead to great capital appreciation.
Inflation hedge
As the economy grows and inflation rises and falls, commercial real estate doesn't feel the long-term impacts. Luckily, rents can be adjusted accordingly to the inflation rate and offset the impact. This results in strong rent growth and appreciation for your property, despite any worsening conditions in the economy. With other investments like stocks and bonds, inflation almost always has a negative impact.
On the flip side…
Commercial real estate, like any investment, has downsides as well.
For starters, it's a time commitment. Investors need to put time into managing and taking care of the property and its tenants. All of the building concerns and problems fall into the lap of the owner, so that aspect needs to be taken into consideration.
This leads to another downside — managing and taking care of the building usually requires outside help, like property management companies. These companies are not cheap and can be costly. However, this is really the only way to properly run the building and avoid running into issues.
This leads to the need for cash. Unlike residential real estate, commercial properties need a lot more capital for the initial investment and then cash that needs to be put into the property to maintain it. This makes commercial real estate investing unappealing since there are a lot of costs to carry the property, and it can take time for the revenue to outweigh the costs.
Related: 5 Proven Steps to Become a Real Estate Millionaire, According to an Investor
At the end of the day, every investment comes with risks. No investment is guaranteed. However, some may be a little bit more secure than others. Commercial real estate is a great idea if you're someone looking to diversify your portfolio and find another way to increase your wealth. Although it may be daunting, and the initial investments can be scary, the returns can be very high and worth it!
