Whatever your investment strategy, diversification offers some safety and security, so if one sector goes down, the other sectors—in theory—are less affected. There are opportunities for the short-term (three years or less) investor as well as the investor looking for a long-term (seven years or more) strategy.
Commercial real estate provides the investor many advantages over other sectors, such as stocks and bonds.
Commercial real estate is tangible, and the owner thus has more control over its performance versus stocks and bonds, which give very little control to individual shareholders.
Here are five reasons why commercial real estate is a sound investment to diversify your investment portfolio.
- There are five different types of commercial property in which to invest: office, retail, industrial, multifamily and land. Within each type, there exist subtypes such as “medical” office or “light” or “heavy” industrial. Each of these is very different from the others. An investor’s personal preference may be dictated by past experience or comfort level with one category over another.
- The real estate market is less volatile than other sectors. Typically, a government announcement about the economy, including interest rates, usually does not have a significant or immediate effect on pricing, lease rates or returns.
- Commercial real estate tends to have an attractive higher annual return (6 percent to 12 percent) than other investment opportunities. Although there are many factors that affect the return – one being that a higher risk will usually offer a higher return – there are safer types of investments such as triple net investments (NNN) that allow an investor to have no additional expenses after the initial outlay is made.
- Most properties offer a steady cash flow that allows the investor to have the expenses paid, including the mortgage. There are a lot of factors that affect cash flow such as rental rates, expenses, vacancy rates, time of purchase, market trends, etc. It is possible to adjust some of these factors to ensure maximum cash flow.
- There is the depreciation advantage. Although appreciation and overall return are the ultimate goals, being able to depreciate the asset and add to the passive loss helps on annual tax liability. The depreciated value also has no effect on the market value. The IRS also has a provision, called a 1031 exchange, that allows an investor to sell one property and defer paying capital gains tax if the investor uses the proceeds in another investment property. There are many rules and regulations to a 1031 exchange, and the investor should always consult an accounting professional in all tax obligations related to an investment property.
Where to begin
To begin investing in commercial real estate, you normally have to have capital in excess of $100,000 to $200,000 available. This is because commercial real estate loans (for investment purposes) generally require larger down payments (25 percent to 50 percent in some cases) than a traditional residential mortgage. You can also form groups of partners to invest together, which allows for a larger overall valued investment.
Investing is a relatively easy process in which to get started. First, determine which sector of the commercial real estate you want to get into. Then contact a commercial real estate broker that works on investment properties and specifically on the sector you choose.
After you and your broker have identified some properties, it is time to begin a thorough due diligence review process. This is where you would use the assistance of outside people to inspect and survey the property, as well as verify that what you are being told about the property is true. This process can take anywhere from a few weeks to six months or more, depending on the type and condition of the property.
Trained and experienced brokers such as those at LevRose Commercial Real Estate will take the time to determine an investor’s goals and help to facilitate the proper investment, whether the investor is a first-timer or a seasoned veteran.