8 Reasons to Invest in Commercial Real Estate
Congratulations! If you’re reading this, you’re probably considering investing your money. If your goal is to grow your nest egg by passively investing in a conservative asset that will appreciate over time, you have several good choices, including the obvious: gold, stocks and bonds. You should also consider the less mainstream option of commercial real estate.
Maybe you associate real estate with residential, i.e.: peoples’ homes. However, for the passive investor looking stable long-term opportunities, commercial real estate is the way to go. The term commercial real estate is broad. Google it, and you’ll find it defined as any property used for commercial profit-making purposes, such as free-standing retail buildings (think a CVS), malls (strip and indoor), office buildings (from single-story to skyscrapers), manufacturing facilities, apartment buildings, and more.
Despite its advantages, many don’t consider investing in commercial real estate to be an option, because running and maintaining real estate is intimidating, time-consuming, aggravating and stressful. It also requires a high level of expertise, and traditionally, an initial investment of at least $250,000.
Today, companies like ICG are removing those barriers. They make it easy, with turn-key options that allow investors to reap the wealth-building rewards of commercial real estate investing, while other people (experts) do the work. ICG also allows investors to “get in” at far lower investment levels of only $50,000.
With the key challenges of real estate investing solved, there is no excuse for missing out on this advantageous asset. Here’s why:
1. The ultra-high net worth individuals invest in it, so why don't you? Real estate typically comprises over 30% of super-rich investors’ investment portfolios. They learned a long time ago that real estate is one of the best places to make their money work for them because it creates cash flow, appreciation, and tax deductions that traditional stock market options do not offer.
2) Stability and Predictability: Commercial real estate rental income is stable and predictable. Leases have built-in rent increases. In apartment rentals, increases are yearly. Commercial office and shopping center leases sometimes adjust less often, usually every 2-5 years.
3) Unique Flexibility to Reinvent Your Investment: Unlike other investments, real estate can be changed over time to accommodate market evolution and/or your financial needs. For example, you can refinance, enlarge, renovate, change a building’s use and a host of other options.
4) Better returns than stocks or bonds with reduced risk: From 2000-2017 the S&P 500 averaged about 7% annual return. According to the Bloomberg Barclays US Aggregate Bond Index, annual Bond returns for the same period averaged 5.2%. Commercial real estate (measured by NCREIF Property Index, which measures the growth of institutional investment in private commercial real estate) averaged 16.13%. These returns include the Great Recession period.
5) Leverage. Taking out a mortgage to buy real estate is a huge advantage over stocks and bonds. Purchasing a building with a typical 35% down payment (and 65% mortgage) increases your investment return, as compared to stocks and bonds that you buy all-cash. For example, if you buy an apartment building using leverage, and it appreciates by 20%, the return on your cash investment is almost 60%. ($100,000 property purchased with $35,000 down and $65,000 loan increases in value to $120,000. Subtract the $65,000 to repay the mortgage, and the $35,000 initial investment, and it leaves you with $20,000 in profit from a $35,000 investment or an ROI of 57%)
6) Massive Tax Deductions – Real estate is the most tax-favored investment in the United States. In broad strokes, real estate income is tax sheltered, thanks to deductions for mortgage interest, depreciation (a non-cash expense that reduces the value of an asset because of theoretical wear and tear, age, or obsolescence over the period of its useful life), property taxes, insurance, repairs and maintenance, travel-related costs, and operating expenses. *Check with your accountant for specifics on tax benefits.
7) Inflation hedge – Because your rents increase on a regular basis (typically at a rate equal to or above inflation) your income can keep pace, or, even outpace inflation. If you own real estate in up and coming areas, your rent roll can grow much faster than the rate of inflation.
8) Principal Paydown – The best part: your tenants pay down your loan! Every month, a portion of the rent your tenants pay goes towards paying down your mortgage principal (the amount you owe to the bank, not including interest). As your mortgage principal decreases, your equity (the difference between the market value of your property and the amount you owe the lender who holds the mortgage.) grows.
Don’t wait. Learn more about how real estate can diversify your portfolio and help you build long-term wealth.