A substantial investment portfolio includes commercial real estate. This type of investment remains as one of the best in providing excellent risk/reward profile to investors. Let’s review five reasons why investing in commercial real estate should be considered for growing wealth.
EXCEPTIONAL APPRECIATION OF ASSET VALUE
Compared to other investments, commercial real estate has historically shown outstanding appreciation in value. Real estate can increase in value due to internal factors such as renovations and cost-effective improvements. Also, due to external factors such as supply and demand in the market.
Property owners in the United States benefit from the real estate tax code in place.
Mortgage interest and depreciation deductions can affect a large portion of a property owner’s stream of income. It is advised to consult a tax professional to understand all of the tax advantages received from owning commercial real estate.
Commercial real estate is considered a hard asset, meaning it has a valid inherent value. The land the property sits on has value, as well as the structure built there. Choosing a quality location and asset creates security to investors in knowing that the property will earn income no matter of the existing tenant. This is where commercial real estate proves to be a stable investment compared to the stock market, which dramatically fluctuates.
LEVERAGE AND INCREASE CURRENT CASH-FLOW
An investor can multiply net spendable cash by borrowing at a lower cost than the property returns to them. For example, if person A loans person B $10 and asks for $12 back, a two-dollar interest fee is applied. Then, if person B takes those $10 and lends it at a $3 interest fee, without any additional investment, they can pay back the $12 they borrowed from person A, and still make one dollar in profit. That’s positive leverage, and it is commonly practiced with commercial real estate.
SIGNIFICANT INCOME AND SPENDABLE CASH
A huge benefit of commercial real estate is that assets are usually secured by leases. These provide a regular stream of income. Compared to stock dividends, commercial real estate dividends are significantly greater.
It is recommended that the benefits of owning commercial real estate are carefully considered as well as the challenges one might face. This type of investment is full of advantages that allow an investor to grow the value of their investment portfolio securely.
Purchasing and maintaining your first rental property is a big step. It can easily become overwhelming. When you are making such a large investment, there is a lot of pressure to ensure you achieve a positive cash flow in return.
There are many successful real estate investors out there. How do they do it?
Most of the rental property basics for success are likely things you can assume, but may not think about until you list them out and make them more manageable. As with any investment, long term success is about running the numbers and doing your fair share of research.
Residential Versus Commercial Investment Properties
Most first-time real estate investors will choose to purchase residential property, such as a single-family home or duplex. This is a smaller investment than purchasing an apartment building or office space (commercial property).
Other benefits to residential real estate include that it’s easier to secure investing, it’s a more familiar purchasing process to most buyers, and the path to finding renters is more straightforward. It is easier to manage one tenant than it is to maintain a building full of them or deal with the concerns of business spaces.
Choosing a Residential Property To Invest In
While there is certainly ongoing maintenance to make a rental property successful, most of the work for a financially viable rental is done before the purchase is ever made. You need to choose the right property to invest in.
The old adage about real estate is true: location is everything.
While many investors will choose to purchase something close to where they currently live, this may not always be the wisest choice and deserves careful evaluation.
If you want to manage the property yourself, as opposed to hiring a property management company that would take 10% of the revenue, you will want to be near by to handle maintenance emergencies.
However, you will need to run the numbers to see if this earns you the best returns in the long run.
When looking at a location, consider property taxes that will need to be added to your regular expenses. You should also consider the type of renters your location will attract. Will you be renting a property near a college campus? You will likely have more maintenance problems than a property rented to someone older. Are you renting to a family? In this case, what are the schools in the neighborhood like? The crime rate and job market are other important factors to take into consideration.
To have a profitable rental property, you will need to look at what your projected expenses are (mortgage payments, property taxes, and a healthy maintenance budget) and put that up against your projected income. Take a careful look at the average rent in your neighborhood and add in some time for the property to be empty while you find renters.
The more work you put in to finding the right property to invest in, the better chances you’ll have for a long term successful investment.
State lockdowns have only been in effect for less than two months — and many states are already beginning to reopen in stages — but the impact of the coronavirus pandemic on the real estate industry is already being felt. Real estate transactions are difficult to complete, many apartment buildings are unable to handle showings, and nearly two million homeowners across the country have missed a mortgage payment already amid skyrocketing unemployment rates.
The impact of COVID-19 on the real estate market is widespread and comes from many sources.
Mortgage rates continued to fall and reached an all-time low in March but may fall as low as 0% or lower as the Federal Reserve worries about keeping the market functioning and credit and liquidity available.
The market has already been slow, but Chinese buyers, who for years have been a significant source of foreign demand for U.S. real estate, are no longer buying in in-demand markets in California and New York. Some of this impact is due to rules by the Chinese government on international spending as well as tightened U.S. immigration rules, travel bans, and quarantines.
Delays in closing are also having a major impact on sales. In many cases, it can be very challenging or even near-impossible to close a real estate deal with travel restrictions, different state definitions of “essential business,” and mandatory quarantines. These complications can make it difficult for a buyer to see a property before making an offer and complete due diligence.
In a handful of states, real estate transactions can only be conducted with significant limitations. In New York, for example, real estate must be conducted remotely, including appraisals, inspections, and title services.
As unemployment skyrockets and uncertainty grows about the state of the economy in the upcoming year, demand for homes has also fallen. More than 10 million unemployment claims were filed in two weeks at the end of March alone, and this number is expected to rise.
Some banks are suspending foreclosures, and many cities and states have enacted eviction and foreclosure moratoriums as one-third of renters failed to make rent payments in April. While this is a temporary fix to ensure people have homes, it doesn’t fix the long-term problem of how rent and mortgage payments will be made. If mortgage payments are suspended for too long, it will also strain lenders who will not have the capital to lend to new homebuyers when demand increases.
While this is an expected impact, other forms of damage to the real estate market aren’t so apparent at first glance. Homebuilders are facing supply chain disruption as nearly one-third of materials come from China, which may delay construction when demand does pick up.
The mortgage and real estate industry may rebound very quickly from the uncertainty and impact of COVID-19, but it will likely still lead to fewer people in the market in the year or two to come.
Real estate presents a lucrative opportunity to you if you can do due diligence, yet having business partners will boost your individual potential. Using the skills or experience of other professionals in real estate is smart, but partnerships can also be more challenging than sole proprietorships. Just don’t be discouraged by the potential cons of partnerships, for many people do thrive within them. Below is a better look at what partnerships in real estate can and can’t do.
A lack of resources in generating leads or building a property portfolio can be overcome through partners who have the contacts you need. What you must ask, however, is if you have anything to give to your partners in return.
You reduce your personal exposure to risk if others share in with your liabilities, but you’ll have to state how much liability each partner has. Be sure that you’re also comfortable with any risks that you agree to.
Business partners are ideal when they can offer strategic perspectives. You know the phrase that “two heads are better than one,” but if you can’t always communicate professionally with a certain person, then they might begin a habit of disagreeing with you without cause.
Having diverse skillsets gives a business the ability to expand by specializing in more than one area of expertise. Your objective, before acquiring partners in real estate, should be to examine how you can use the diverse skills of your associates.
Some professionals see the potential of profit as being reduced if it’s to be shared, but you should consider that more money can actually be made when more manpower is available. Try to also measure your end rewards based on your individual sacrifice. You can come into a partnership knowing that your share is small if your input is also kept small, having little to do or oversee.
It’s important to be able to discuss differences in opinions with your partners, for without establishing professionalism, you all may end up misunderstood. Look for partners with enough character to stay patient in the wake of misunderstandings. Partnerships are rewarding, but you dictate the dynamic between you and the people you work with.