What are the reasons to invest in commercial real estate?

answered 2011-12-28 11:51:11 -0500

@mjking
336 ●2 ●10 ●20 http://www.kiddermathews....

updated 2012-01-15 18:02:16 -0500

We recently posted a blog post on the advantages of investment real estate. Here is the post:

Investing in commercial real estate is attractive for a variety of reasons. Commercial real estate investment offers a number of distinct advantages, several of which are discussed briefly below.

1. Positive Cash Flow Investment in income-producing properties often generates an income stream that can be used to fund different needs, such as retirement.

2. Tax Advantages As a result of deferred taxation, the after-tax return on commercial real estate typically is greater than an alternative investment with a comparable before-tax yield. The cost-recovery deduction normally defers (and saves) taxes, an effect that is magnified by debt financing.

3. Appreciation In addition to the periodic cash flows, the sale (or reversion) cash flow of a property can represent an increase in value.

4. Inflation Hedge Real estate investment typically has been an excellent hedge against inflation.

5. Diversification Commercial real estate offers diversification from other investments such as securities (stocks and bonds) and commodities, which have different risks.

6. Psychological Benefits The fact that real estate is a physical asset (i.e., bricks and mortar) provides a certain amount of psychological security over more nonphysical assets such as securities.

7. Positive Leverage/Principal Reduction In many cases, an investor may obtain financing with a lower interest rate than the overall un-leveraged yield of the property. This will increase the yield to equity, including reduction of the mortgage balance.

Source: http://www.soundcre.com/2011/10/12/advantages-of-investment-real-estate/

answered 2012-01-14 10:06:05 -0500

LancasterCommercial
86 ●6 http://www.lancastercomme...

The Four Secrets to Building Wealth with Investment Real Estate

There are many benefits to owning investment real estate. Pride of ownership, portfolio diversification and direct management control are just a few. However, let’s face it, if investment real estate didn’t contribute to our personal bottom line, few would find it attractive.

So what do successful real estate investors know that others don’t? The secret is to understand the four ways investment real estate increases your net worth. Let’s get started:

1. Cash Flow

   The most basic and understandable method to make money owning real estate is cash flow. Cash flow is simply defined as the net change in dollars in your checking account during a period of time (such as a month) that occurs as a result of owning and operating real estate. Put another way, cash flow is equal to the money that is left over after you collect rents and pay all the bills, including the bank note. Having a positive cash flow is crucial to the ability to hold an investment in the long term.

2. Price Appreciation – with Leverage!

   The appreciation, or increase, in the market value of property is many times responsible for the lion’s share of the profit from investment real estate. This is especially true for short holding times. The old adage, “buy low, sell high”, expresses this basic principle. What makes appreciation so powerful in real estate is the ability to borrow a portion of the purchase price. Consider an example whereby an individual has $10,000 to invest either in stocks or commercial real estate. Furthermore, let us assume that both investment choices will appreciate the same amount in a year, say 5%. At the end of the year, the stock account will be worth $10,500, or an increase in $500. However, the real estate investor understands leverage; the ability to borrow a portion of the purchase price of an investment. Most investors can borrow 80% of the value of a property. So the $10,000 cash available can, with this leverage, purchase $50,000 worth of real estate. Growing the $50,000 by the same 5% results in $52,500, or an increase of $2,500. Who likes $2,500 better than $500? Answer: real estate investors.

3. Debt Pay Down

   This method flows from the leverage principle introduced above. When investors borrow money from the bank to purchase real estate, they pay it back with monthly payments exactly like a home mortgage. A portion of those payments goes to interest and a portion goes to principle. To the extent that collected rent is used to fund the principle portion of the monthly debt service, this rent money builds the equity of the investor by paying down the debt. Lowering debt increases net worth.

4. Tax Depreciation

   This method of wealth creation is entirely due to the vagaries of our current tax code. However, it does create real dollars in your bank account, so we should understand it. Here we go: The government acknowledges that buildings age and in doing so, lose value. They allow us to recognize this loss of value annually by treating it as an operational expense, just like a utility bill. This operational expense can be used to offset the profit from operations, thus lowering the tax due on those annual profits. The government does recover a portion of this tax loss upon the sale of the property via capital gains, however, for most investors capital gains tax is less than operational profit tax so a net gain is realized over time.

Now you know what real estate investors know. What you do with that knowledge is up to you!

answered 2011-12-28 13:18:37 -0500

Pat Eberlin
193 ●2 ●5 ●13 http://www.pateberlin.com...

I have clients that like the ability to have a hands on approach with their investment. A building is something they can control. You don't always know what is going on behind the curtain with some other investments.

answered 2011-12-28 11:17:19 -0500

Paul Bielec
81 ●2 ●3

Many investors use CRE as a way to diversify. Interest rates are historically low right now. If you can lock in financing at a favorable rate, your investment will serve as a hedge against inflation. While rents rise your debt service will remain the same.