Real estate is a unique investment vessel in the sense that is combines the advantages of investing and owning a business. The investing side offers passive income, where the business side gives you a tangible product that you have a large measure of control over. There are many different segments of real estate, but this blog will focus on providing a few key benefits into investing in commercial real estate (CRE).
As a CRE investor, we typically evaluate deals using our long-term lenses. The initial investment is often more costly but as you’ll see below, it can have a bigger payoff in the long run.
1.) Want to Grow Your Business? CRE may offer you more leverage
CRE can give you a way to grow your portfolio without draining your liquid assets by leveraging. Investopedia offers this definition of financial leverage: Financial leverage results from using borrowed capital as a funding source when investing to expand a firm's asset base and generate returns on risk capital. When you own CRE, you can place future debt, often much higher than your initial investment, against the property allowing you to increase your wealth.
Leverage is the use of debt to amplify returns on an investment. We can explore a simplified look at leverage using the example of real estate vs the stock market.
If you have $25,000 in the stock market, it will buy $25,000 in stock and give you $25,000 in stock assets. If you received a 10% return that year on those stocks, it would be $2,500 gain.
CRE leverage allows you to take the same $25,000 amount and purchase a $100,000 property. The 10% return is not on the $25,000 you put in, but on the $100,000 property. So, you have a $10,000 gain. 2.) Faster Appreciation Means More Money
Often times the biggest money made in real estate is earned through appreciation over the long-term. Appreciation is the increase in value of an asset over time.
If we continue to use our simplified example of purchasing a $100,000 property, the appreciation of that property at just 5% would be $5,000. Now multiply that over the life of owning the property!
In general, CRE appreciates in value faster than most other types of investments. Of course, this is further multiplied if you get a good deal on a property in which you can make improvements in a cost-effective manner. Improvements increase the asset value in the long-term because the property by increasing the property value. Further, improvements increase the value in the short-term because you can command more for an improved space.
3.) There is Just Simply Less Market Competition
The residential real estate investing market has become a very popular in the last decade, contributing to shortages of properties for investors and driving up prices. CRA investing tends to have fewer investors making it more likely to close a deal.
4.) Want to be in More Control of Your Money?
Many investment avenues offer little control. CRE can be different.
You can gain instant equity in properties by mining the right deals.
You can decide when to create value through improvements as we discussed earlier.
5.) The More Tax Benefits the Merrier
There are several tax benefits involved with CRE investing. We advise you seek council of a vetted tax professional who knows real estate investing to understand the tax breaks you are eligible for and ensure you aren’t making any mistakes that could cost you dearly. Some really great tax benefits you may be eligible for are:
Mortgage interest deduction
Depreciation deduction
1031 exchanges
You may be eligible to become classified as a full-time RE professional
6.) Protection is so Important. CRE Investing can Mitigate Risk
A unique benefit to CRE investing is its ability to be insured against losses or litigation. You can set up an LLC for protection, and you can insure properties against damage. These steps all help in protecting you as the individual investor.
CRE tenants tend to be more respectful and professional because these properties are used for their livelihood. This leads to a more synergized landlord/tenant relationship.
7.) Once a Building Cash Flows, You Have More Capital to Reinvest
Each property in your portfolio should provide you an alternate income stream. When you buy and hold a property, your tenant is paying for the asset. The rent you charge should more than cover operating expense & a mortgage if necessary.
CRE leases usually have a consideration than that of a residential lease and because a commercial entity tends to be more stable than an individual, vacancies are less common. As such, a CRE investment can yield a more reliable, steady stream of income than residential investing.
Spring Valley offers real estate lending products designed for the investor. Call us today to discuss our commercial real estate lending options, 513-761-6688.