By Seth Lane, Director
Why invest in Commercial Real Estate?
People, companies, and institutions invest in commercial real estate for different reasons. Some businesses want to own the space they occupy. Some individuals want to earn a yearly return on a retail center through rent collection. Other investors may be interested in a "buy-and-hold" scenario, seeking to realize a return through appreciation. Understanding some of the basic reasons behind commercial real estate investments are an important step in defining your personal or your businesses investment goals.
Buying Real Estate is not the same as funding an IRA ... in a good way.
If I fund my IRA each year, it will grow at a faster rate that if I fund it once and never put a penny in. Other than standard maintenance, a property owner does not have to invest large amounts of money in their commercial real estate asset on a yearly basis. While the owner will build equity if the property is mortgaged, the owner will receive a return on his investment which, hopefully, is higher than his debt service. In many cases, an owner will be able to use the positive cash flow above the debt service to cover repairs, for investments in other ventures, or as additional income.
Long-term, commercial real estate is a good vehicle for investment returns. Property values of investment real estate can grow in many economic environments where other investments are declining or unstable. Each dollar of appreciation equates to a dollar of added equity in a property. Slow and steady growth is an attractive aspect of owning investment real estate
Keep the IRS at bay.
Investment property can offer tax benefits. Through write offs and depreciation, an owner can reduced taxable income or capital gains. I don't want to overstep my boundaries here, and tax implications can be area-specific ... so ask your friendly neighborhood tax lawyer for advice on this.
Turn a little into a lot through leverage.
Leverage can allow one to invest a fraction of the sticker price yet still purchase a commercial real estate investment. While harder than ever, securing financing for an investment property provides excellent benefits. I won’t elaborate now, but this will be the focus of a few upcoming articles.
Predictable and often very attractive returns.
Whether tax concessions, increased equity through appreciation, or positive cash flow, investment real estate can provide very good returns. We will get into this in future articles as well. Looks for specific information on CAP Rates, Cash on Cash returns, and Internal Rate of Return, all of which can help you define what your return will be.