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There are lots of ways to invest in real estate. You can flip houses; rent out properties; buy real estate-related stocks, real estate investment trusts (REITs), and ETFs; or even take part in crowdfunded deals.
Another great option worth eyeing? That'd be commercial real estate (CRE): a high-risk but also high-reward asset class, which encompasses a whole slew of property types you probably haven't even considered investing in.
Are you interested in exploring commercial real estate investments? Here's what you need to know.
What is commercial real estate?
First off, what exactly qualifies as commercial real estate? At its most basic, it's any property designed to make money. It can include all the major categories you probably expect -- retail stores, office buildings, industrial warehouses, restaurants, etc. -- as well as more specialized property, like storage spaces, hotels, casinos, and even healthcare facilities.
Why invest in commercial real estate?
Whether you're coming from a long career in residential property or you've never invested in real estate at all, CRE can be a smart place to put your money. But why commercial real estate? Here are 11 reasons you might want to consider it for your real estate portfolio.
1. High income potential
The biggest reason to invest in commercial real estate is simply its potential. Commercial buildings come with higher rents and price tags, and thus higher potential for returns, too. Instead of making a few hundred dollars on a rental home every month, you could make thousands, tens of thousands, or even more if you choose the right properties.
These increased margins could even help you grow your portfolio faster (if you opt to invest them in new properties as the funds roll in).
2. Tax benefits
There are also tax benefits that come with commercial real estate investments. First, you have depreciation, which can allow you to deduct a portion of your property's value from your taxable income each year. For many investors, this reduces the total tax burden quite significantly.
Thanks to 1031 exchanges, you can also avoid capital gains taxes when you eventually sell your property, too. You'll just need to "exchange" those profits for another property or asset when doing so. (There are nuances here, so talk to a tax advisor before using this strategy.)
3. Less competition
Residential real estate is incredibly competitive -- especially right now -- which has driven prices upward for some time. CRE, on the other hand, is seeing an opposite trend. The dollar volume for commercial real estate in the U.S. was 57% lower year over year in the third quarter of 2020. So it should be easier to find a commercial property right now -- especially compared to other assets on the market.
4. Plenty of investment opportunities
Commercial real estate investment options run the gamut: You can invest in a full-scale mall or high-rise office building, or you can keep it small, putting those dollars toward a single storage facility, an industrial warehouse, or just one condo community. There's a lot of flexibility both in what you can invest in and where you can do it.
5. Less turnover
If you're from the world of residential real estate, this will probably excite you. Unlike apartments and single-family rentals, commercial real estate doesn't typically operate on one-year lease agreements. Instead, most tenants sign three-year agreements at minimum. This reduces turnover (and the hassle and cost associated with it) and also helps ensure stable cash flow for your business.
6. More help maintaining (and improving) your property
With commercial properties, the maintenance, upkeep, and improvements generally aren't all on you. For one, many operate using triple net leases. These put the majority of the property-related expenses on the tenants' shoulders -- things like taxes, insurance, maintenance, and even utilities.
On top of this, most tenants are generally more invested in keeping up the property than your standard residential tenant would be. Since they're a business -- and likely trying to market to clients of their own -- they'll be more dedicated to keeping the building in good repair. They might even make some improvements to the space that increase your property value over time.
7. Fewer problematic tenants
Tired of dealing with residential tenants who just won't pay up or will leave the place in shambles after their lease is up? Sick of tenant disputes and renter complaints? With commercial real estate, things are usually a bit more professional.
Since you're working with business owners -- ones with reputations to protect and dollars on the line -- they're typically more careful in both working with landlords and following the rules. This results in a lot less hassle for the investor/property owner.
8. More off-hours
Don't confuse my words here: CRE takes a lot of work. But the number of hours you're getting calls from tenants or heading up to the property? They're a lot more limited than in the residential world.
In the commercial sector, the majority of your tenants are operating on your typical, 9-to-5 schedule. It typically means more "time off," in the sense you can be away from your phone and not on call for more hours in the day.
9. A more diverse portfolio
If you're already heavily invested in residential real estate, CRE can be a smart way to diversify your portfolio. As 2020 taught us, you never know what's going to happen -- with the economy or in the world. So having your investments spread across different assets is one of the wisest moves you can make in the long run.
10. Good deals may be on the horizon
COVID-19 didn't bring much positive news to the world, but for future CRE investors, there might just be a silver lining. Thanks to increased work-from-home arrangements, as well as the overall economic downturn, interest in some sectors of commercial real estate waned in 2020.
The dip has allowed CRE prices to decline a bit -- at least in some sectors. According to the October 2020 RCA CPPI: U.S. summary report, U.S. commercial real estate prices rose at a 1.4% annual rate from September 2019 to 2020, a noticeable slowdown from the mid-single-digit growth rate in 2018 and 2019. Though prices on apartments and industrial properties actually rose (up 6.7% and 7.4% year over year, respectively), properties in the retail and office building sectors saw prices drop (5.3% and 1.5%). Depending on how long the pandemic stretches out, those prices in weaker sectors could fall even further.
11. It's proven
Finally, CRE is simply a proven, worthwhile investment. Just look at billionaires like Warren Buffett, Stephen Ross, Donald Bren, and of course, President Donald Trump. Tons of mega-wealthy investors have made fortunes in commercial real estate and continue to do so.
Considering commercial real estate investing?
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