It is a well-known fact that robust economies can significantly amplify the worth of investments in commercial properties, thus providing the investor with a steady, reliable return rate. As a stark contrast to the turbulent nature of stock markets, commercial real estate presents an impressive risk/reward proposition, making it a compelling choice for the discerning investor.
Washington D.C. and its surrounding areas host a plethora of potential commercial real estate properties. This spectrum ranges from office spaces, malls, retail spaces, apartment buildings, restaurants, to warehouses and industrial properties. Unlike residential properties leased out for habitation, commercial real estate properties are typically leased out to serve as workspaces. Many investors are drawn towards commercial real estate as it offers a sound opportunity to put money into an asset that guarantees a continuous, long-term income.
When intending to acquire a commercial real estate asset, investors are advised to assemble a professional team comprising a real estate broker with a specialization in commercial properties, a lawyer proficient in the intricacies of commercial real estate investment, and an accountant armed with a thorough understanding of the tax laws pertinent to real estate investment. Alongside these professionals, a highly skilled property management team is also critical.
The role of professional property management in commercial real estate is fundamental. A proficient property management team can significantly enhance the value of your investment by ensuring efficient operations, maintaining the property in top condition, fostering good tenant relations, and staying abreast of compliance requirements. Their ability to prevent potential issues and swiftly resolve unexpected problems often makes them an indispensable part of your investment strategy.
This team formation is typically an attempt to diffuse potential risk, with investors often congregating to form a corporation. In such setups, each investor holds a pro-rata share of the property's value based on their individual investments. Consequently, if the venture turns profitable, they receive dividends at the end of the fiscal year in direct proportion to their share of ownership.
Commercial real estate properties, due to their larger investment quantum, attract less investor competition, thereby affording property owners more flexibility in selling the property. This is an aspect that further strengthens the case for commercial real estate investments.
Investing in commercial real estate comes with numerous benefits. One of the primary benefits is the potential for higher lease payments per square foot compared to residential real estate. Commercial properties are generally categorized as multi-lease properties, with lease agreements typically structured to last anywhere from 3 to 10 years. This ensures a more long-term financing structure for the building. The multi-lease structure also mitigates the risks and costs associated with potential vacancies. Therefore, even if a tenant chooses to vacate, the owner continues to amass rental income from the remaining tenants. A particularly effective strategy is to invest in commercial properties with government tenants as they are known for their stability and tendency to renew leases, thereby ensuring a steady income stream at a high return rate and promoting equity growth over time.
Another advantage of commercial real estate investments is the tendency for these properties to appreciate in market value over time. This means that as an investor, you can buy a property, let it build equity over a period of time, and then sell it for a profit in the future. Moreover, returns from commercial real estate investments exhibit a strong correlation with inflation when compared to other asset classes. This feature, known as a hedge against inflation, is a significant benefit of commercial real estate investments. Lease structures in commercial real estate investments are often poised to keep pace with inflation, as rent usually undergoes renegotiation when a lease comes up for renewal. Further, according to a report by TIAA-CREF, a property that generates more net operating income in response to inflation has a higher likelihood of appreciating in value, even if interest rates rise.
A noteworthy aspect of investing in commercial real estate is the control it offers. As the owner, you can dictate the type of tenants, the lease terms, upgrades to the property, and even consider changing the property's usage. Contrary to residential properties, in commercial real estate, it's usually the tenant who bears the costs for maintenance, utilities, insurances, and real estate taxes. This arrangement bolsters the returns from commercial real estate, which is typically not the case with residential properties where these costs fall upon the landlord. Furthermore, commercial tenants often make improvements that enhance your investment's value and signal a likelihood of lease extension.
The 1031 tax-free exchange is another beneficial feature of commercial real estate investment. This allows investors to sell a property and reinvest the proceeds into another real estate asset without incurring capital gains tax. Investors looking to diversify their portfolio can take advantage of financial leverage. Leverage comes into play when the buyer invests a portion of their cash resources into multiple properties, while a lender, typically a bank or a private investor, finances the remaining purchase price. This arrangement allows the investor to distribute their financial resources across multiple properties.
For those who may not have the necessary capital to invest directly in commercial properties, real estate investment trusts (REITs) offer an accessible alternative. Modeled after mutual funds, REITs enable investors to buy a share in a commercial property, akin to purchasing a stock, thereby availing the economic benefits of commercial real estate ownership. With properties spread across various states, REITs offer portfolio diversification, long-term performance, and can even be included in retirement accounts.
Conclusion: Harnessing the benefits of commercial real estate investment can significantly build your equity. But, like any significant financial decision, it's critical to do your research and seek professional advice before diving in.
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