Commercial real estate is a great way to build your investment portfolio. When the economy is strong, investments in commercial properties can grow in value and provide an investor with a steady rate of return. With stock markets being volatile, commercial real estate can be an excellent risk/reward investment.
There are plenty of potential commercial real estate properties in and around Washington D.C. These include offices, malls and retail spaces, apartment buildings, restaurants, industrial properties, and warehouses. Commercial real estate properties are leased out to provide a workspace, as opposed to residential ones , which are leased out to provide a living space. Investors will seek out commercial real estate as a way of investing their money into an asset that offers a constant, long-term rate of return—or income.
Before purchasing a commercial real estate asset, investors should hire a team consisting of a real estate broker who specializes in commercial properties, a lawyer who specializes in commercial real estate investment, and an accountant with knowledge of real estate investment tax law. Generally, investors team up to spread any risk, often forming a corporation. Each investor will have a pro rata share of the value of the property based on their investment and, if there is a profit, receive dividends at the end of the year proportionally based on their percentage of ownership.
There is less investor competition in commercial real estate since these properties are larger investments, so owners of commercial real estate properties are typically more flexible when looking to sell.
There are several benefits to investing in commercial real estate. One benefit is higher lease payments per square foot than residential real estate. Unlike the short-term leases of a residential property, commercial properties are multi-lease properties that generally have leases structured to last from 3 to 10 years that will finance a building over time. This lease structure adds the advantage of security because it minimizes the risks and costs of any vacancy. Even if one tenant vacates, you will continue to collect rental income from the other tenants. A good strategy is investing in commercial properties with long-term government tenants because they are stable and generally renew their leases. The end result of these benefits is a regular income stream from tenants at a high rate of return, providing equity growth over time.
Another benefit is commercial properties generally go up in market value. This means your investment will appreciate. In other words, purchase the property, let it build equity, then sell it for a profit in the future.
In addition, commercial real estate investment returns have a high correlation to inflation when compared to other asset classes. This benefit is called a hedge against inflation. Commercial real estate investments have the advantage of lease structures that can help them keep pace with inflation, as rent is usually renegotiated when a lease is up for renewal. Property values can be another factor. According to a TIAA-CREF report: “….the more net operating income generated by a property in response to inflation, the greater the likelihood that the property will also appreciate in value, even if interest rates increase.”
Investing in commercial real estate also provides more control than other real estate investments. As owner, you have control over the type of tenants, the terms of the lease, upgrades to the property, and whether to change the use of the property.
Unlike residential properties, the tenant pays for maintenance, utilities, insurances, and real estate taxes. This allows returns on commercial real estate to be higher than residential properties, where the landlord pays for the property’s costs. In addition, commercial tenants often invest in other improvements which help your investment and provide assurance that the lessee will stay.
Another benefit is the 1031 tax-free exchange. This permits investors to sell the property and move that money into another real estate investment without paying capital gains taxes.
If you want to invest in more than one property, you can benefit from financial leverage. Leverage occurs when the buyer invests a portion of cash resources into multiple properties, with the balance of purchase prices contributed by a lender, typically a bank or private investor. The investor can receive long-term, fixed-rate financing to pay the debt. In this way, the investor is spreading his/her financial resources across several investments.
If you don’t have the capital to invest in commercial properties, there is the option of real estate investment trusts (REITs). REITs are investments in large-scale commercial properties that are accessible to average investors. An investor can buy a share in a REIT, similar to purchasing a stock, and earn a share of the economic benefits of commercial real estate ownership. REITs are modeled after mutual funds and offer investors portfolio diversification and long-term performance. REITs can even be part of a retirement account. REIT-owned properties are located in every state.
You can build your equity by taking advantage of the benefits of investing in commercial real estate. If you take the action and make the leap to invest in this asset class, remember to do your homework and get professional advice before making any business and financial decisions.