The commercial real estate market is quite different from the stock market, but similar risks and investment strategies still apply.
The appeal of investing in this type of property is manifold. Investors can generate higher returns on investment and enjoy tax benefits by investing in different asset classes or types of properties.
Investing in commercial real estate involves investing money in the purchase of commercial real estate, including office buildings, multi-family apartment buildings, hotels, shopping malls, storage facilities and shopping centers. commercial, among other types of properties.
If you are interested in this type of investment, you should make a commitment to investing commercial real estate wealth for the long term.
Since commercial real estate is an illiquid asset, your money can be tied up for a long time. Illiquid investments tend to generate higher returns over time and are not subject to daily price volatility, but some opportunities may have a higher barrier to entry. If you are looking for more liquid investments, commercial real estate may not be the best option for you.
Real estate as an asset class can be a rewarding investment. But beginners should be aware of the investment risks associated with this type of real estate property. Here’s what you need to know about commercial real estate investing to determine if it’s right for you:
- How to get started in commercial real estate investing.
- Risks and Benefits of Commercial Real Estate Investing.
- Should we invest in commercial real estate now?
How to get started in commercial real estate investing
Before embarking on commercial real estate investing, it is important to ask yourself several questions.
Jeff Bartel, president and CEO of Hamptons Group, an alternative Miami-based investment and advisory firm, says you need to determine whether you prefer a crowdfunding approach or investing in a single property.
Investors who choose to crowdfund with a group of other people should “look at the track record of the company they’re investing with,” Bartel says. “Fully recognize their rights and obligations regarding (whether) or not to withdraw their funds from the investment during the period of time.”
For those investing in a single commercial property, Bartel recommends identifying unique features that “enhance or undermine the attractiveness of the property or trends in the area that could be problematic.”
Many professionals in the commercial real estate industry got their start with single-family home rentals, including Paul Getty, President and CEO of First Guardian Group in San Jose, California.
“Well over 90% of commercial real estate investors start with single-family rentals and use it as a way to educate themselves, build wealth and progress to investing in other properties,” he says.
While investing in residential real estate is very different from investing in commercial real estate, building a foundation in residential real estate can prepare you for commercial real estate investments.
Another avenue: technology offers many new investors, with varying levels of experience, the opportunity to familiarize themselves with commercial real estate investing.
Apps like Fundrise, CrowdStreet and others provide access to commercial real estate investments, usually reserved exclusively for the private market, for individual investors. Many of these platforms have learning tools and resources, and a professional network to connect with other real estate investment professionals.
Today’s infrastructure that enables real estate investment training “makes it much easier to make the right choices and avoid making mistakes,” says Getty.
Risks and Benefits of Commercial Real Estate Investing
Every investment carries some sort of risk, and commercial real estate is no different.
While the economy is in recovery mode, the impact of the pandemic has affected some commercial properties more than others over the past year. Vacancy levels increased for properties including retail, office space and apartments, while other properties such as industrial centers and data centers performed better.
But Steven Buss, founder of Also Partners in Minneapolis, says long-term contractual leases are an important feature of the commercial real estate industry.
When a commercial property has a long-term contractual lease, you don’t have to worry about short-term market risks.
“It’s an insulator against economic volatility,” says Buss.
“The longer they are in the long run, it usually means a higher value for the property because you have the certainty of a fixed income, and that creates a higher valuation in the market,” Buss said.
Since the value of real estate deteriorates over time, there is a tax code that allows owners of commercial buildings to write off the value of the property and benefit from an annual deduction of income tax. returned. This allows the investor or owner to be compensated for any real estate improvements needed to deal with wear and tear as the property is used.
Depreciation allows you to keep more of your money by saving it in taxes. For non-residential properties, the IRS allows depreciation over 39 years, which can have significant benefits over time.
Another reward that comes with investing in commercial real estate is the 1031 exchange, a tax instrument that defers capital gains. When you sell an investment, you usually have to pay capital gains tax, but a 1031 swap allows real estate investors to suspend capital gains tax when selling a property to provide more income. capital when purchasing another investment property.
Should we invest in commercial real estate now?
The economic environment is well positioned for commercial real estate in 2021, experts say.
Getty points to a series of factors that make the current economic climate ideal for starting to invest in commercial real estate, particularly historically low interest rates.
“With relatively small amounts of money, say $ 25,000 to $ 50,000, you can have a lender advance you money and you can buy a property for $ 200,000 with a small down payment. The power. Leverage with low interest money is awesome because you are using other people’s money to help you accumulate your money, ”he says.
Investors who choose to take advantage of today’s low interest rate environment can lock in an interest rate on a commercial mortgage for a period of time.
You may be able to eliminate the “interest rate” risk for a while, says Buss. This makes low interest rates a “yield enhancer,” increasing your returns after debt.
“When you borrow 60% or 70% of the purchase price, interest rates are at all time low and you can lock in those interest rates for five to ten years, which improves your returns after debt,” explains Buss.
Other factors that Getty observes that indicate a good time to invest in real estate include stable stock market performance, large amounts of stimulus in the economy, and the investment infrastructure today that supports widespread access. to data.
A strong emerging class in commercial real estate: industrial. Bartel says this industry has grown over the past three to five years due to the “boom in digital delivery.” This includes commercial real estate such as storage facilities, warehouses or showrooms.
The segment that has suffered the most from the pandemic: retail spaces. Although Bartel says there are still opportunities for growth in this area.
“When you have a space that can be rented at a lower price, well located rather than having to rent informal industrial areas for distribution centers, we are going to see opportunities for retail, malls and Linear malls used for distribution centers, “Bartel says. This trend of pop-up distribution centers will continue in locations across the country,” he said.
Knowing the trends that are occurring in the commercial real estate markets is important when identifying investment opportunities.
Commercial real estate investing has some unique advantages, but like any investment, it has its advantages and disadvantages.
Whether you are a newbie to this real estate market or a seasoned investor, the same due diligence rules and the same sound investing principles should be a priority.