Many investors seek opportunities in real estate, both commercial and residential, as an alternative investment to stocks and bonds. Even during times of economic uncertainty, commercial real estate can potentially deliver the appreciation and stable returns investors are looking for in their assets.
Investing in commercial properties comes with other advantages, too. No matter what type of property you’re looking to invest in, below are some of the potential benefits of investing in commercial real estate.
One of the biggest reason to invest in commercial real estate is its potential to produce income. Commercial buildings may come with higher rents and price tags than residential real estate, meaning a higher potential for returns, though that is not the only factor you should use to determine a property’s income potential. Other factors, including projected occupancy and location, and potential rental income, should also be included in your considerations.
Commercial real estate investments can potentially offer stable income that can be higher than typical yields on stocks and bonds. Income can be distributed yearly, quarterly or monthly , though it depends on the individual investment. This stable cash flow can potentially provide protection from the volatility of the financial markets by acting as a source of income when investments, such as stocks and bonds, are falling. Historically, it does not move in sync with stocks and bonds, though that is not a guarantee.
The potential stable income can help you grow your portfolio faster, if you choose to invest in additional properties with your profits.
A variety of options are available for for investors. For example, you can choose to invest in a hotel, an office building, or a different property altogether. There is a lot of flexibility when it comes to what type of property you can invest in, and which markets you can choose to enter.
There are primary, secondary, and tertiary markets, all which come with different investment opportunities. Research into each market will help you make the right choice for your portfolio.
Aside from the variety of properties, there are multiple ways to invest, such as through real estate investment trusts (REITs) or private equity firms, or you can choose to invest on your own.
With economic uncertainty being a concern for investors, having a diverse portfolio may ensure at least some of your assets are generating income. What this means is that while stocks and bonds may fall during an economic recession, commercial or industrial real estate may still produce some income.
Commercial real estate investments may also provide an escape from correlated returns. Correlated returns are defined as when one investment’s return is linked to the performance of another investment. The returns for these investments, whether positive or negative, tend to move in the same direction at the same time.
Commercial real estate is different because it is a noncorrelated investment. Its performance is typically not linked to that of the stock or bond markets.
For investors worried about how inflation will affect their portfolios, investment in commercial real estate may be a hedge against its effects. High inflation is concerning because it may erode the value of a future stream of cash flow, especially as prices rise.
Rental income has the ability to rise with inflation, meaning the rental rates also see an increase in price, though this only applies to shorter-term leases. The potential resulting increases in net operating income (NOI) may drive property values higher, but may increase costs, too.
To protect against potential inflationary pressure, some commercial real estate leases contain a clause that calls for rent increases at regular intervals throughout the lease term. The impact these increases cause may lead to rising income, which leads to rising values.
Depending on the property, it may have a short-term lease, such as one-year leases in a multi-family unit and daily leases in hotels and 3-5 year leases in flex and industrial properties. These shorter and staggered leases potentially allow properties to increase rents to market levels to keep up with inflation.
A potential benefit is the ability to place debt on the property, which can increase purchasing power of each dollar of equity. Leveraging is defined as the procedure where a commercial property is not purchased in full, but with the assistance of debt. In other words, it allows you to use less equity to purchase.
This, in turn, may increase total potential returns, depending on the cost of debt versus the cost of equity. The idea behind leveraging is to be able to potentially increase returns by using other people’s money at first, so you don’t have to put as much of your own capital into investing.
Rental payments may act as a kind of savings program for investors, where the rent pays the outstanding debt and reduces the asset’s leverage. The key is to make moderate use of debt, finding a balance between risk and return and ensuring there is enough cash flow from rental payments to service monthly mortgage payments. Despite its potential risks, many investors may still find leveraging worth the risk.
Properties have the potential to increase in value over time. Both internal and external factors can affect how a property appreciates in value.
Proactive management strategies, which look to prevent problems before they arise, and property improvements are examples of internal factors that effect a property’s value. Making improvements may increase its intrinsic value and purchase price, as well as its ability to earn income during the holding period. This could include updating cosmetic details, such as flooring or appliances in a multi-family unit. Though updates involve many expenses, they tend to allow you to charge higher rents.
Supply and demand imbalances are an example of external factors. For example, if your property is located in an area experiencing a booming economy and increasing population, it will likely appreciate. Real estate is a scarce asset. More raw land can’t be created, which leads to an increase in demand as scarcity increases. Keep in mind scarcity depends on the market a property resides in, though, so demand tends to vary.
Commercial real estate investments can potentially provide a variety of tax benefits to the investor. There are deductions through depreciation or debt, as well as programs such as the Opportunity Zones program, which incentivize the investment.
One of the most well-known benefits is depreciation, which allows you to deduct a portion of a property’s value from your taxable income each year. This reduces the overall tax burden. Despite depreciation recapture, which is when you have to pay taxes on the amount you depreciated while owning the property, the amount you may save in taxes each year will likely outweigh the tax bill.
Mortgage interest may also shield a portion of your income stream. When purchasing a commercial property with debt, the interest expense is tax-deductible, meaning that you may write off the amount of mortgage interest paid on the loan each year against your income. This may reduce your overall tax liability.
1031 exchanges may help you defer capital gains taxes when you eventually sell. So long as you invest in another like-kind property and follow the other guidelines, you can complete an exchange and defer capital gains.
Opportunity Zone programs were designed to stimulate investment in some low-income communities throughout the US. Similar to 1031 exchanges, these programs allow investors to defer eligible capitals gains until December 31, 2026 if they choose to invest in an Opportunity Zone Fund.
There are also non-mortgage tax deductions. They allow you to deduct operating expenses, such as repairs and maintenance costs. General improvements, such as renovations, are depreciated over the life of the property.
The above are only a few examples of potential tax incentives. Each comes with its own guidelines and criteria, so it may benefit you to familiarize yourself with them. You may want to talk to a qualified tax advisor about these tax incentives, too, as there are nuances to each and they may be able to help find which benefits you qualify for.
Commercial real estate is one of few investment classes that is a hard asset, with meaningful intrinsic value. The land has value, as does the structure itself. Unlike stocks and bonds, which can be of value one day and of no value the next, real estate maintains intrinsic value, even if the property values rise and fall.
The land or building on a property may be restructured or remodeled to create new opportunities for value. It is also reassuring for some investors to have an asset they can physically see and touch. If something were to happen to the structure, the land is still there for rebuilding or sale.
This asset type can be a good investment for you if you’re looking to expand and diversify your portfolio. It largely appeals to investors due to potential returns, passive income, and growth opportunities. If you’re looking to add an alternative investment to your portfolio, commercial real estate might be the right fit for you.
One of the main reasons is commercial real estate’s income potential. The range is typically higher than the rate of return for residential properties, depending on market conditions and the current economy. Leases also bring in passive income without too much involvement from the investor.
Both commercial and residential properties have the potential to be a good investment, but it depends on your goals. Commercial properties typically offer a higher risk and reward than residential properties, but this varies based on market conditions. You would benefit from evaluating your portfolio and determining which type of asset is best for you.
Avistone is a rapidly growing commercial real estate investment firm specializing in the acquisition, management, and selling of high-quality commercial and hospitality properties nationwide. We offer accredited investors the opportunity to purchase equity shares with the potential to receive in-place cash flow and capital appreciation over a 3- to 5-year projected hold period.
Since our founding in 2013, Avistone has acquired properties totaling over 3.9 million square feet in California, Georgia, Texas, Florida, and Ohio. These consist of hotels, warehouse, high-tech, R&D, and office use properties. Currently, our offerings include a strategic fund focused on opportunities in the hotel sector.
To provide the best possible outcomes for our investors, we acquire properties located in dynamic markets with proven demand, high occupancy rates, strong economic indicators, and the potential for consistent in-place cash flow. We also use best practices in asset and property management to increase net operating income and cash distributions to investors.
If you’re interested in commercial real estate investments, contact us today.
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