Someone recently asked me why I should invest in Commercial Real Estate. It might seem prudent not to invest in real estate now, given the widely publicized fall in residential property prices in certain areas. However, real estate is all local and San Antonio has seen an increase in prices despite the fact that sales volume has slowed down to what it was in 2005. Commercial real estate is an entirely different beast.
- First, commercial real property is only property for businesses. This includes retail centers, office buildings and warehouses.
- It is also less common than homes. San Antonio has approximately 14,500 commercial properties, compared to 300,000.
- Third, commercial real property is not for your personal use, but for investment returns.
Investing in this area is a smart move. Real estate has been the foundation of some of the most successful fortunes in America. Property investment can yield returns that are higher than inflation, whether it’s Donald Trump or the King Ranch. Diversification is key to financial planning. This means that you should diversify your investments into sectors that are not similar. It can be difficult to invest in the stock market where you can observe the day-to-day and hour-by-hour fluctuations of your portfolio. Because real estate is not traded often, its valuations are more dependent on yearly trends in supply and demand. It is prudent to invest 5% to 15% of your portfolio in property. Real estate can often move in opposite directions to the stock market, which will help stabilize your overall returns. The index of equity realestate investment trusts has shown that commercial real estate returned 12.4% over the past decade, compared to the SP-500’s return of less than 10%. These are the main ways that you can make money investing in commercial realty.
- Income: Tenants will lease commercial investment properties to them, such as businesses and retail shops. After the mortgage and expenses have been paid, these leases will generate rental income which should result in positive cash flow. You could earn a profit of 5% to 10% each year depending on how much you have invested.
- Depreciation: Also known as cost recovery, this tax write off shelters some or all your income from the expense taxes. The cost of the building, as well as some components of it, is deducted. However, the land on which it sits is not included in the deduction.
- Equity building: You can use the rental income from your tenants to pay your mortgage. This reduces the amount you owe and builds equity in your property.
- Appreciation: Property becomes more valuable as rent income rises, 2) the market places a higher value upon the rents, and 3) the land value increases. Inflation is another factor that can cause property to increase in value. This makes it a great hedge against inflation.
- Leverage: You can borrow money to purchase the property and then control the whole property for a small portion of the purchase price. Your equity investment will appreciate because your mortgage is fixed. You can own more property with less money. If you purchase a property for $4 and have $1 of your own money and $3 borrowed, the property’s value rises to $5. Then you can sell the property, repay the $3 borrowed, and keep $2. When the property’s value increased only 25%, you have doubled your money. The interest on the mortgage is exempt from tax.
These five elements of commercial investing are referred to as IDEAL by Certified Commercial Investment Members, who are experts in commercial realty. This is a great way to remember them. Although commercial property investment may not be the best, it can help diversify your investments. This will ensure that your mind and lack thereof are not tied to one type of investment like stocks, bonds or gold. It is smart to spread your investments across a variety of investments. Investing in commercial real estate can make a difference. What are the top three things you should be doing in real estate?
- Because it is essential because property is not mobile, the location is important.
- Timing. In 1980, a tract of land at north Loop 1604 was simply a ranch or ranchette along the “death loop”, the two-lane farm to market road just outside of town. gugluhomes has become a six-lane expressway, with offices, retail centers and restaurants. This is because of the growth path and time. You can also find empty tracts of land within Loop 410 that have not been developed on. This could indicate that growth has halted in the area or that properties are losing value and have been neglected. Californians believed that 15% annual appreciation was their birthright. They have now seen the trend reversed. Real estate, like most things in life is all about timing.