Commercial real estate investments are lucrative for those who are willing to take risks and think long-term. These investments diversify income streams and provide a steady stream of passive cash flow.
Annual returns are typically higher than those from residential properties, stocks, or bonds – reaching up to twelve percent. However, CRE investing requires significant capital and is best suited for individuals who possess extensive knowledge of the market or hire firms that do.
Investing in commercial real estate can offer more consistent and higher returns than residential properties. Nevertheless, investors should conduct thorough due diligence on any potential investment. This may include reviewing financial documents, tax returns, and profit and loss statements. It also includes conducting surveys, property inspections, and a feasibility study. Additionally, investors should understand how zoning restrictions affect the building’s use and what can be built on the land.
Commercial real estate investing offers a number of tax benefits, including deductions from depreciation and debt. Investors can choose to invest directly in a property or purchase shares of REITs that own a portfolio of properties. A direct investment is best for investors who want to manage their own properties and receive the most benefit from tax deductions. However, it requires a significant initial investment and can take longer to turn a profit.
Commercial real estate investments can earn income in two ways: generating rental income, and capturing appreciation. When a property owner leases out spaces to tenants, this generates revenue that is netted against expenses, including vacancies and ongoing maintenance costs. Typically, these netted revenues reach the investor in the form of dividend distributions.
In addition to capturing rental income, active investors often take a value-add approach by improving properties to boost their intrinsic value and purchase price. This might involve renovating cosmetic details or adding new amenities, or it could include rezoning land to allow for more apartment units.
Historically, direct commercial real estate investing has been out of reach for most individual investors due to large initial capital requirements and the need for deep reservoirs of expertise in improving and operating properties. But now options like Fundrise make it possible for anyone to invest in a diversified portfolio of private market commercial real estate with a low minimum investment and a potential for stable income.
While many investors are drawn to commercial real estate due to its income potential, it is important to remember that this property type is not a passive investment. Instead, it requires a significant amount of time and effort to analyze and execute a deal. In addition, commercial real estate tends to have higher price tags and lower cash-on-cash returns than residential properties.
When people think of commercial real estate, they often envision office buildings or multifamily apartments. However, the commercial real estate sector is much broader than these two types of assets. It also includes warehouses, retail centers, “mixed use” buildings and hotels.
Another reason why investors like commercial real estate is that it typically provides stable cash flow and is less volatile than the stock market. This can provide protection from economic uncertainty and provide a source of income when other investments, such as stocks and bonds, are falling. It can also provide a buffer from correlated returns by helping to diversify a portfolio.
Investing in commercial real estate is a good way to earn steady income streams and windfall profits when property sales are made. Investors must remember that profit is not always equal to ROI (return on investment) as the final resale value of a property may be reduced by costs incurred during sales such as broker commissions and appraisal fees.
Inflation is another factor that can drive returns on CRE investments higher. Rental rates can rise with inflation, and that may also increase the cash flow a property generates from its tenants.
Direct commercial real estate investing requires more expertise than house-flipping and may provide slower profits, but it can be an effective way to build wealth over time. It is important to understand that real estate is a hard asset that maintains intrinsic value, unlike stocks which can be of value one day and worthless the next. It is also a good idea to speak with an experienced tax advisor regarding the potential tax benefits of commercial real estate investing.