Investing in commercial real estate is an effective strategy to earn passive income and build generational wealth. But don’t take our word for it…
“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” – Andrew Carnegie
“A funny thing happens in real estate. When it comes back, it comes back up like gangbusters.” – Barbara Corcoran
“Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth.” – Theodore Roosevelt
Today, there are several ways to invest in commercial real estate.
One can invest in properties directly, indirectly through a fund model, or through publicly traded marketable securities (i.e. REITs).
Disclaimer: Dixon Link Capital is not a legal or tax advisor. The information in this article is intended for educational purposes only. We recommend consulting with your legal or tax advisor prior to making investment decisions.
Below are 8 tangible benefits of investing in commercial real estate. While this is not an exhaustive list, these benefits represent some of the most popular and prominent reasons for including real estate as part of a comprehensive investment strategy.
1. Income Generation
In commercial real estate, rental income is earned from tenants, providing investors with a steady cash flow. Leases on commercial properties are often longer-term in nature compared to residential leases, providing investors with more income stability.
When investing in commercial real estate during a project’s development/construction phase, investors often require a higher rate of return, given the increased risk involved by participating at such an early stage.
Whether a commercial real estate project is stabilized or in the midst of development, Dixon Link Capital can help secure competitive financing options for acquisitions, renovations, construction, refinancing, and more. Submit your loan scenario here.
2. Property Value Appreciation
Commercial real estate has the potential to appreciate in value over time. This can result from various factors including improvements made to the property, economic growth in the area, and increased demand for a certain property type and/or location. A property’s value can also increase over time due to the increase/stabilization of income generated by the property.
Why does this matter? For one, value appreciation of an asset relative to any outstanding liabilities (which should decrease over time as principal and interest are paid down) positively impacts one’s balance sheet and overall net worth. This can result in qualifying for and receiving more favorable terms for financing future real estate projects.
If you’re seeking financing for your business or commercial real estate deal, we’ve put together a guide on what lenders really want to see on your commercial loan application. Check it out here.
3. Diversification
Investing in commercial real estate can help diversify an investment portfolio. Commercial properties tend to have a low correlation with other asset classes, such as stocks and bonds, which helps spread out risk and reduce overall portfolio volatility.
Real estate can be a strong addition to a comprehensive, long-term investment strategy. We recommend consulting with your financial advisor before making investment decisions.
4. Inflation Hedge
During inflationary periods, the value of real assets, like income-producing commercial properties, typically increases. Real estate is scarce in nature, and this supply-demand dynamic contributes to driving property values higher during inflationary periods.
As inflation rises, property owners can adjust rents to keep pace with rising costs, including materials, labor, insurance, and more. By ensuring rents are in line with inflation, investors can maintain their income stream and protect their overall purchasing power.
5. Tax Benefits
Investing in commercial real estate allows one to take advantage of various tax benefits. These benefits include depreciation deductions, mortgage interest deductions, and the ability to defer capital gains taxes through like-kind exchanges (i.e. 1031 exchanges).
Consult with your tax advisor to further discuss how investing in real estate impacts your unique situation and overall tax strategy.
6. The Benefit of Control (Direct Real Estate Investments)
Unlike marketable securities like stocks and bonds, commercial real estate gives investors a degree of control over the performance of their investments. If investing in a real estate property directly, investors can make decisions regarding property management, leasing, renovations, and other factors that can directly impact investment returns.
If one invests in real estate indirectly, through vehicles such as a fund or REIT, one has little to no control over investment performance. However, investors still gain exposure to the asset class and still enjoy many of the benefits listed here. Additionally, many prefer their real estate investments to be passive in nature, which reaps its own set of benefits.
7. Demand Stability
Another benefit of investing in commercial real estate is its generally stable demand. This is especially true for commercial real estate properties in prime locations, such as established and growing markets. Businesses need space to operate, and as the economy grows, the demand for commercial properties tends to increase.
8. Multiple Investment Options – and Property Types
Commercial real estate encompasses many different property types, including multifamily, retail, mixed-use, industrial, office, etc., all with unique demand drivers. This diversity allows investors to choose assets and projects that align with their investment goals and risk tolerance, and adjust their strategy based on current market conditions.
Dixon Link Capital secures competitive financing solutions for all commercial real estate property types nationwide. Book a call with one of our seasoned loan officers to get started.
Investing in Commercial Real Estate – The Bottom Line
We’ve shared just a few of the many benefits of investing in commercial real estate. Investing in commercial real estate is a great way to create multiple (and passive) income streams and build generational wealth.
What other benefits of investing in commercial real estate would you add to this list?
