Real estate is one of the best investments anyone can make. People will always need a roof above their head, which is why you’ll never run out of business if you’re selling or renting out real properties. But in terms of return on investment (ROI), commercial properties usually offer a much higher financial reward.
What is a Commercial Property?
This term may refer to real properties, like retail shops, office buildings, warehouses, apartment buildings, industrial spaces, and mixed-used buildings. Each of these properties will require property management services at some point to ensure that multiple tenants are always on top of the rental payments and that a vacancy is filled in right away.
Commercial properties are either sold to businesses or private individuals or are rented out. Some of the wealthiest people on the planet have invested in various commercial real estate properties.
What Makes a Commercial Property a Better Investment?
No, investing in commercial real estate isn’t a recent phenomenon nor is it just a trend. This practice dates to the 1800's when John Jacob Astor was the very first American to become a millionaire through commercial property investing in Manhattan.
Here are some of the compelling reasons this type of investment is more favorable:
1. Higher Income Potential
Generally, single-family properties only have a return of the purchase price of 1% to 4%, while commercial properties with multiple tenants have 6% to 12%. And unlike stocks or mutual funds, commercial property investment can pay out cash distributions regularly, which means that they don’t need to sell the investment to generate income. Aside from that, commercial real estate can cover any problem that might come, especially during a recession. As a matter of fact, commercial property investments prove to offer the highest ROI.
2. Capital Appreciation
More than having a steady flow of cash, commercial property investments can help you create massive wealth simply because of capital appreciation. Commercial real estate properties increase in value over time. Even during a recession, apartments, commercial buildings, and other commercial properties prove to be the most important hedges to inflation. This is because commercial real estate property values are not affected by inflation. Rents increase with inflation.
You don’t pay the full amount of a commercial property. You only need to make a 20% or 30% down payment and pay the rest of the amount with a mortgage. This allows you to increase your wealth faster.
For example, you invest in a commercial real estate property worth $4,000,000 with a $1,000,000 down payment and $3,000,000 mortgage for a certain period. While you’re paying the mortgage, you’ll be earning money from rental payments made by tenants. Over time, the value of your building or apartment complex could double. This means that you’ll have more than 50% return. This is the reason banks are more willing to loan money to commercial property owners. Because of this leverage, commercial property investors can have more favorable financing terms if they want to take out a loan.
A commercial real estate investment offers more security than other types of investments. This is because these assets are based on basic needs, such as shelter and storage. There is a strong and increasing demand for commercial spaces wherever you go. This lowers the risk, giving investors some peace of mind.
Because commercial spaces have multiple tenants, property investors gain balance and diversity in your portfolio. You don’t need to rely on a single tenant for income. When a tenant leaves, it doesn’t really have a huge impact on your investment since there are other renters.
6. 1031 Exchange Tax Credit
Commercial real estate investors may face a dilemma when they want to sell a commercial building. Some owners fear that they are going to be slapped with huge capital gains tax bill should they decide to sell the building.
But seasoned investors know a way to avoid paying a hefty amount for capital gain taxes. This is called 1031 exchange, according to Section 1031 of the Internal Revenue Service code. It is stipulated in the law that for people to defer paying capital gains tax, you need to buy a like-kind property using the money from the sale of the investment property. This strategy reduces your tax burden.
Consider these factors mentioned when looking to invest in a commercial real estate property today.
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