As a real estate professional, you already know that purchasing property is a solid investment. However, many residential real estate agents don’t look far enough beyond their own expertise. Choosing to invest in commercial real estate can expand your horizons, diversify your portfolio, and generate income to solidify a financially independent future.
Here, we’re looking at the reasons you should invest in commercial real estate, the best kinds of commercial real estate, and how you can start investing today.
Of course, before entering any investment – real estate or otherwise – you should contact an experienced financial advisor or real estate accounting professional.
What is Commercial Real Estate?
Before we go any further, let’s talk about commercial real estate. Generally, there are four main types of commercial real estate or CRE:
There are many other subcategories of CRE, but these are the most popular for investors. Many real estate agents tend to gravitate towards multifamily properties – duplexes, fourplexes, apartment buildings, and the like.
Commercial real estate is any property through which the owner or owners receive monthly income via rent payments.
5 Reasons Agents Should Invest in Commercial Real Estate
Residential real estate is a good investment. If you didn’t believe that, you likely wouldn’t be in this line of business in the first place. But too often, there is a clear divide between the residential real estate world and the commercial real estate world. In reality, investing in both residential and commercial real estate can create a diversified portfolio that stands up to the ebbs and flows of both markets.
There are several reasons you should invest in commercial real estate.
1. Generate Monthly Income
Many people invest in commercial real estate to generate passive income. Commercial properties are occupied by tenants, whether that be a business, manufacturer, or an individual or family. As a property owner, you receive rent from each of your tenants every month.
These rents can add up to significant income, depending on the number of units you own, your overhead and management costs, and your occupancy rate (how many of your units are currently rented).
Many factors impact your monthly income from each unit. However, if you can get the property at a great price and manage to have every unit rented, it’s not uncommon to make a few hundred dollars or more per month, per unit.
In addition, office space, retailer centers, and industrial properties can be extremely lucrative if purchased for the right price, in the right area, and leased to the right tenant.
2. Create Long-Term Wealth
Just like residential properties, when you invest in commercial real estate, you’re in it for the long-game. However, every month you own your commercial property is another month gaining equity. Over time, you’ll pay off any debt you incurred on the property and be left with an income-generating machine.
Perhaps that’s why so many investors choose real estate. It’s a great way to build generational wealth that can pass on to your children and grandchildren. When you leave behind real estate, you’re leaving tangible assets that can create monthly income for your family long into the future.
3. Longer Lease Terms Mean Less Volatility
Depending on the types of CRE you invest in, you could find tenants who sign multiple-year leases. It’s not uncommon for businesses to sign office or retail leases for three to five years or more. In that case, you, as the property owner, have less volatility than in the residential real estate market.
Therefore, investing in commercial real estate often means less unpredictability than residential real estate. Even in a multifamily property, you’re likely to have most of your units rented at any given time. It’s unlikely that all your units will be empty at the same time.
4. Diversify Your Investments
Any financial advisor will tell you that diversification is the key to a successful investment portfolio. Sure, you should invest in the stock market, physical commodities like oil or gold, and government bonds. But including real estate in your portfolio is an excellent way to cover all your investment bases.
It’s also important to diversify your real estate investment portfolio too. While owning your home is important, investing in various commercial real estate properties can solidify your financial future.
Markets rise and fall. It’s the nature of investing. However, when you have your wealth spread out over multiple areas, you’re less likely to experience a catastrophic drop. That is, if all your money is tied up in the stock market, and then the market sees a recession just before you retire, you could lose a significant portion of the money you’d invested. However, if you spread those funds out, investing in commercial real estate as well, a recession wouldn’t impact your bottom line so drastically.
Real estate has proven to be a safe investment that nearly always increases in value over time.
5. Tax Advantages
When you invest in commercial real estate, you’re also gaining significant tax advantages. Property owners can significantly reduce their tax burden by merely owning and operating commercial real estate. These tax advantages include:
- Deductions and write-offs
- Capital gains
Plus, you can leverage these investments for even greater tax savings by investing in Opportunity Zones or rolling your investments into a 1031 Exchange. Contact a commercial real estate broker or financial advisor for more information about these options.
What is the Best Type of Commercial Real Estate for Investing?
Like all investments – and all real estate, for that matter – commercial real estate ebbs and flows depending on a variety of factors.
Currently, in the wake of a global pandemic, office space and retail real estate are struggling. Multifamily and industrial/warehouse properties are performing well. Of course, every geographic location is different, so it’s important to do your research and determine which opportunities are best.
If you choose to invest in commercial real estate, you should also consider several factors. Think about your unique skills, which CRE sector interests you most, what property type is performing well in your area, and the overall management and operations costs of each.
How to Invest in Commercial Real Estate
Are you ready to get started? It’s possible to invest in commercial real estate even if you don’t have much money to get started. There are multiple ways to start your commercial real estate portfolio, sometimes with as little as a few hundred dollars.
Many real estate agents choose the direct investment option when entering the CRE market. With this option, you purchase a property or properties outright. Real estate agents have an advantage because they can negotiate better pricing with the seller, find off-market properties, and manage the properties themselves with little additional cost.
Typically, direct investments come in the form of multifamily properties such as duplexes, fourplexes, or other residential units. While there is greater risk in being the sole owner of a property, you will also receive all profits.
REITs or other CRE Investment Funds
Suppose you aren’t in the financial position to purchase commercial real estate outright. In that case, you can still invest in commercial real estate properties via real estate investment trusts (REITs) or other real estate traded funds. In this instance, you’re purchasing a share of a property or properties, pooling your capital with other investors. This is the most hands-off approach to commercial real estate since the company that owns and operates the trust makes the investment decisions and manages the properties.
The benefit here is twofold. First, it’s possible to invest in large-scale, income-generating properties with very little capital. Second, you won’t have to worry about tenants, property management, or any day-to-day operations at the property.
In recent years, investors have turned to crowdfunding to purchase commercial real estate. This option allows everyday investors to generate wealth through commercial real estate.
Similar to business crowdfunding startup sites like Kickstarter or GoFundMe, CRE crowdfunding sites rely on multiple investors pooling their resources together to purchase a commercial real estate property.
Changes to the real estate law now allow real estate crowdfunding, and this method is increasing in popularity. Several websites are dedicated to real estate crowdfunding, some offering buy-ins as low as a few hundred dollars. This is an excellent way for low-net-worth investors to join the real estate investing game.
Investing in commercial real estate allows agents and other real estate professionals to leverage their connections and skills to create lasting wealth. If you want to learn more about investing in commercial real estate, where to invest, or which property type best suits your needs, consider connecting with an experienced CRE firm in your area.
As with any investment, we recommend consulting a financial advisor or real estate attorney before making any investment decision.