Even though the commercial real estate market is very different from the stock market, there are still similar risks and ways to invest in both.
There are many reasons to buy this kind of property as an investment. By investing in different asset classes or property types, investors can get higher returns on their money and get tax breaks.
When you invest in commercial real estate, you use the money to buy things like office buildings, multifamily apartment buildings, hotels, malls, storage facilities, and shopping centers, among other types of property.
If you want to invest in this kind of commercial real estate, you have to be ready to keep the money there for a long time. Since commercial real estate is a hard-to-sell asset, your money could be tied down for a long time.
The returns on illiquid investments tend to be higher over time, and their prices don’t change every day. However, some opportunities may be harder to get into.
If you want investments that can be sold quickly, commercial real estate might not be the best choice for you.
As an asset class, real estate can be a good way to make money. But new investors should be aware of the risks that come with this type of real estate property.
Here’s what you need to know about investing in commercial property so you can decide if it’s right for you.
How to Get Started in Commercial Real Estate Investing?
Before you start investing in commercial real estate, you should ask yourself a few questions. Jeff Bartel, chairman and managing director of the Miami-based alternative investment and advisory firm Hamptons Group, says that you should decide if you want to invest in a single property or in a crowdfunded project.
Bartel says that investors who want to crowdfund with a group of other people should look at the history of the company they are investing with.
“Know all of their rights and responsibilities about whether or not to take their money out of the investment during the time period.”
Bartel says that people who want to invest in a single commercial property should look for “unique features that improve or hurt the property’s appeal or trends in the area that could be troublesome.”
Paul Getty, president, and CEO of First Guardian Group in San Jose, California, got his start in the commercial property business by renting out single-family homes.
“Well over 90% of commercial real estate investors start with single-family rentals,” he says. “They use this as a way to learn, make money, and move up to investing in other properties.”
Investing in residential real estate is very different from investing in commercial property. However, building a solid foundation in residential real estate can help you get ready to invest in commercial property.
Technology gives many new investors with different levels of experience a chance to get their feet wet in commercial real estate investing.
Individual investors can use apps like Fundrise, CrowdStreet, and others to buy commercial real estate investment properties that are usually only available on the private market.
Many of these platforms have tools and resources to help you learn, as well as a professional network where you can connect with other people who work in real estate investment.
Getty says that the infrastructure that lets people learn about real estate investing today makes it much easier to make good decisions and avoid making mistakes.
Risks and Rewards of Commercial Real Estate Investing
Every investment has some kind of risk, and commercial real estate is no different. Even though the economy has been getting better, the pandemic has had a bigger effect on some commercial properties than on others over the past year.
The number of empty stores, offices, and apartments went up, while industrial and data center properties did better.
But Steven Buss, who started the Minneapolis company Likewise Partners, says that long-term leases are an important part of the commercial real estate business.
When you have a long-term lease on a commercial property, you don’t have to worry about short-term market risks.
“It’s a buffer against changes in the economy,” says Buss.
“The longer they are, the more likely you are to get a fixed income, which makes the property worth more on the market,” says Buss.
Since the value of real estate goes down over time, there is a tax code that lets owners of commercial property “depreciate” the property’s value and get an annual tax deduction.
This lets the investor or property owner get paid for any repairs or improvements that need to be made to the property because of wear and tear.
Depreciation lets you keep more of your money because it keeps you from having to pay taxes on it. The IRS lets depreciation happen over 39 years for non-residential properties, which can add up to big savings over time.
The 1031 exchange is another benefit of investing in commercial real estate. This is a tax tool that lets capital gains be put off for a while.
Usually, you have to pay capital gains tax when you sell an investment. However, a 1031 exchange lets real estate investors put off paying capital gains tax when they sell a property to get more money to buy another investment property.
Should You Invest in Commercial Real Estate Now?
Experts say that commercial real estate will do well in 2021 because the economy will be in good shape. Getty says that the current economy is a good time to start investing in commercial real estate because of a number of factors, especially the historically low-interest rates.
“With small amounts of money, like $25,000 to $50,000, you can get a lender to loan you money, and with a small down payment, you can buy a $200,000 property.
You may use other people’s money to make your money grow by using low-interest money, which gives you incredible leverage “His words.
Investors who want to take advantage of today’s low-interest rates can lock in a commercial mortgage loan’s interest rate for a while.
Buss says that you might not have to worry about “interest rate risk” for a while. Low-interest rates are a “return enhancer” because they make your after-debt returns bigger because of this.
“When you borrow 60% or 70% of the purchase price, interest rates are at historical lows, and you can lock in those interest rates for 5 to 10 years, which helps your after-debt returns,” says Buss.
Getty also says that now is a good time to invest in real estate because the stock market is doing well, the economy is getting a lot of help, and the investment infrastructure of today makes it easy for many people to access data.
One strong type of commercial real estate on the rise is industrial. Bartel says that the “rise of digital delivery” has made this sector grow over the past three to five years. This includes places like storage facilities, warehouses, and showrooms that are used for business.
Retail space was the area that was hurt the most by the pandemic. Even though Bartel says that there is still room for growth in this area.
Bartel says, “There will be opportunities for retail, shopping centers, and strip malls to be used as distribution centers when space can be leased at a lower rate and is in a good location, instead of having to leasehold informal industrial areas.”
He says that this trend of pop-up distribution centers will keep happening all over the country. When looking for investment opportunities, it’s important to know what trends are happening in the commercial real estate market.
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