People, companies and institutions invest in commercial real estate for different reasons. Some businesses want to own the space they occupy. Some individuals want to earn a yearly return on a retail center through rent collection. Other investors may be interested in a “buy-and-hold” scenario, seeking to realize a return through appreciation.
Understanding some of the basic reasons behind commercial real estate investments is an important step in realizing your personal or your business’s investment goals.
Buying Real Estate is not the same as funding an IRA—in a good way.
If I fund my IRA each year, it will grow at a faster rate than if I fund it once and never put a penny in. However, other than standard maintenance, a property owner does not have to invest large amounts of money in their commercial real estate asset on a yearly basis. The owner will build equity if the property is mortgaged, and will receive a return on the investment which, hopefully, is higher than the debt service.
In many cases, an owner will be able to use the positive cash flow above the debt service to cover repairs, to invest in other ventures or as additional income.
Long-term commercial real estate is a good vehicle for investment returns. Property values of investment real estate can grow in many economic environments where other investments are declining or unstable. Each dollar of appreciation equates to a dollar of added equity in a property. Slow and steady growth is an attractive aspect of owning investment real estate.
Keep the IRS at bay.
Investment property can offer tax benefits. Through write-offs and depreciation, an owner can reduce taxable income or capital gains. However, tax implications can be area-specific, so ask your tax lawyer for advice on this.
Turn a little into a lot through leverage.
Leverage can allow one to invest a fraction of the sticker price yet still purchase a commercial real estate investment. While harder than ever, securing financing for an investment property provides excellent benefits.
Predictable and often very attractive returns.
Whether through tax concessions, increased equity through appreciation or positive cash flow, investment real estate can provide very good returns. Look for specific information on CAP Rates, Cash on Cash Returns and Internal Rate of Return, all of which can help you define what your return will be.
Seth Lane practices in the area of brokerage, consulting and development with Front Street Commercial Real Estate Group. Front Street is invested, donating 10 percent of all revenues to charity. Call 352-505-3844 or visit frontstreet.net for more information.