Countless individuals have been successful over the years investing in residential real estate and often several factors typically precede such a decision, including appreciation, supply and demand, plus return on investment. Similarly, commercial real estate investing takes these variables into consideration and offers the possibility of larger profits. Many property investing experts are viewing the current market conditions as an ideal time to begin investing in commercial property and land.
Perhaps the most obvious reason individuals consider any kind 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, commercial appreciation is only taxed when it is sold, which allows the owner to take advantage of certain tax laws. Also, since commercial property owners can fill out a 1031 Exchange and avoid paying tax when the property is sold, as long as there is continued investment in real estate, gains are shielded at sale. Thirdly, there are a number of things that an owner of commercial property can do to increase value, such as increase tenants rent or lower operating costs. Lastly, by taking advantage of a triple net lease, commercial property investors can frequently get tenants to pay for the expenses of maintaining the building.
All too often residential property owners find themselves paying for some of the mortgage due to a tenant (typically the only one) not making a payment or because of excessive maintenance costs. However, with commercial properties this rarely happens. The reason for this is because most commercial real estate loans are tied to what is known as a Debt Service Coverage Ratio. This ratio requires a property’s net operating income to be higher than the loan’s payments thereby ensuring both security for the bank and profit for the owner.
Another appealing feature of investing in commercial real estate is that it allows one to diversify in their risk (a critical piece of investing advice worth heeding). Suppose that a strip mall with space for 10 tenants is owned and all spaces are leased, if one of the businesses happens to go under, the owner of the strip mall will only lose one-tenth of their income. If that same investor owned a single family home and their tenant moves out, that investor would lose their entire source of income for that property.
Commercial real estate is a great barrier to inflation; allowing the investor to actually make money. One reason is that rent goes up with inflation and so too does the value of the property. If for example rent goes up, the value of the property correlates. Inflation also drives up the costs of constructing new properties.
Investing in commercial property provides the investor with a source of long-term income and many tax benefits. It also allows more protection in light of diversifying and allowing inflation to benefit the investor. Considered by most as a solid, secure investment type, investors should consider adding commercial real estate to their portfolios.