Guide to commercial real estate growth
Commercial real estate is an alternative for investors in search of a new challenge or those seeking a profitable return on their money. There are opportunities in commercial real estate that may be right in your neighborhood, each with its benefits and drawbacks.
Here, you’ll find all the information you need to evaluate the potential returns on investment in commercial real estate and make the smartest choices possible moving forward, helping you grow.
What’s the distinction between commercial and residential investments?
The primary distinction between commercial and residential real estate investments is the approach taken to value. Comparable sales are used as the basis for residential property valuations (this includes investment properties that are not commercial multifamily).
Current sales of comparable properties in the region are used as comps. Values for commercial properties are typically determined by factors such as Net Operating Income (NOI) and cap rates rather than the market as a whole. When you’re a commercial investor, you care more about the property’s potential return on investment than you would if you were buying a home for yourself or your family.
1. Reasons why investing in commercial property is a good idea
Commercial real estate is a popular alternative for those who want to diversify their portfolios away from the risk of public stocks. Compared to other real estate asset classes, the returns on an office investment are among the most reliable. Office building owners benefit from reliable and predictable revenue flow thanks to the lengthy nature of the fundamental leases (often 5-10 years).
There is diversification in income stream
Commercial real estate has always been a good bet for investors looking to diversify their holdings away from the vagaries of the stock market. Because of the low correlation, your investment portfolio is less vulnerable to the effects of any unforeseen circumstance.
Investing in a stabilized real estate asset offers the possibility of long-term capital appreciation and provides shareholders with consistent, day-one rental income. The cash flow from rent is typically less volatile than other investment possibilities because the lease terms predetermine it. Similar to residential properties, where there are best ways to profit for housebuilders, there are also ways to better monetize commercial real estate.
The ability to protect savings from inflation while earning higher returns
The worth of physical assets like office buildings may be seen and touched. Building quality, location, and tenants’ ability to pay rent on time are stable elements that contribute to this value. Historically, both property values and rent have risen alongside inflation. Since these two factors account for a large portion of annualized real estate returns, buying real estate can be seen as a way to protect your purchasing power against inflation.
The bond market has consistently returned between 5% and 6% annually for investors since 1926, making it a popular choice for those seeking a stable yield. On the other hand, direct investments in commercial real estate can produce yields as high as 13% to 14% while offering many of the same advantages as bonds.
Positive effects on tax bills and prospect of future profit growth
Investing in real estate is popular because of the potential tax benefits. Because of laws, investing in commercial real estate in recent years has been more exciting than ever. If the deal is structured correctly, investors can benefit from tax deferral on distributions and new deductions, such as enhanced bonus depreciation.
Investment in commercial real estate can provide equal development potential, albeit with a unique set of risks. For instance, by paying attention to economic and demographic trends, investors can buy property in areas where they anticipate great demand or popularity growth, leading to significant price gain.
2. Where and how to find commercial real estate listings and sales
Commercial real estate listings are an excellent starting point for anyone looking to buy, lease, or invest in commercial property. Also, remember that commercial real estate is run differently than residential.
All residential properties for sale in a given area are typically listed with a single multiple listing service. This is not the case in the commercial real estate market. First, there is no mandatory commercial real estate listing service because multiple websites already advertise commercial real estate for sale. Additionally, “off-market” commercial real estate that is still up for grabs is not uncommon. This indicates that access to the property is restricted to members of a select group, either through a private mailing list or a tight network of real estate brokers. Because of this, locating commercial property can be significantly more challenging than finding a residential property.
Where to look for for-sale commercial property?
For the reasons mentioned above, locating commercial real estate currently on the market can be challenging. Hiring reliable commercial real estate experts like Pinpoint Commercial Real Estate Mississippi is a terrific method to access exclusive marketing channels and email lists often reserved for commercial properties for sale. As a rule, commercial real estate listings will first make their way through these exclusive channels before appearing on any public commercial real estate listing websites.
3. When is the right time to invest in a commercial property?
Whether you have a bearish or bullish outlook on the economy, now is a fantastic opportunity to put money into commercial real estate.
Before signing any real estate offering memorandum, brokers need to have the ability to deploy funds on a deal-by-deal basis as the number of investors demanding bilateral co-investment in real estate has increased. The current investment climate is favorable since the economy is expanding, interest rates are near record lows, and commercial lenders are competing for new businesses.
Growing office space demand maintains a stable flow of income
The demand for more office space is evident, with the younger generation trying to enter its prime earning years, the expansion of already massive corporations, and the desire of many businesses to bring their employees back into offices (from which they can be safely isolated) after a year spent working remotely. Cash flow from rents is one of the most valuable aspects of commercial real estate. Investments in commercial real estate that are backed by leases can produce reliable passive income that is unaffected by fluctuations in the market.
Low-volatility inflation hedging
For the most part, rents go up in tandem with inflation. Values of properties tend to go up with increases in operating income. Therefore, this is a good thing. Given this dynamic, investing in commercial real estate can be a very effective way to protect oneself from inflation.
The value of residential and commercial real estate in the United States has increased steadily over the past several decades. Commercial real estate can be a defensive investment strategy due to its low correlation to other asset classes and counter-cyclical character.
Prospects for growth in value
Business property is more likely to increase in value when held by the appropriate people. In other words, there is an opportunity to earn higher profits upon selling the asset.
Conclusion: Better-decision in commercial real estate starts with action
After what has been called “the most volatile period in history,” investors are seeking tangible assets and other safe, long-term investments. Tax advantages, higher yields than public markets, the ability to lock in long-term debt at attractive costs, physical assets with capital preservation, and rising labor and material costs in anticipation of future inflationary pressures are just a few of the many reasons why commercial real estate is a good investment.
One of the most appealing aspects of commercial real estate has always been its reliability. Including commercial real estate in your wealth management plan is a good idea if you haven’t already. Soon, you’ll be signing real estate offering memorandums left and right for your clientele.
