A recent NAR report, commercial real estate investments in the US topped $152.7 billion in 2018, a 17% increase from 2017. The stats reveal that commercial real estate has been an attractive investment, even during market fluctuations.
The NCREIF index shows the average annual returns of 8.8% from Commercial Real Estate (CRE) over the past 15 years. This indicates that CRE investments yielded higher profits as compared to residential properties. Investing in commercial real estate is an effective strategy for diversification that is luring a significant number of investors on a global level.
In addition, commercial real estate as a tangible asset provides stability and acts as collateral for investors. That said, both local and foreign investors are looking to the US, especially Texas (due to less tax burden, growing population, sprawling land, and bigger economy), as a haven to preserve their investment and generate steady income. Due to its stability in the US, in contrast to the uncertainties in many countries, international investors are expected to continue to invest in US commercial real estate.
What accounts for an impressive increase in CRE investment and why has it become a valuable consideration for investors?
Here are the main reasons:
CASH FLOW
Commercial real estate investments usually yield steady cash flow with passive income distributed to investors regularly such as monthly, quarterly, or annually. The returns depend on the conditions included in the agreement. Not to mention, investing capital in CRE offers income in the present and possible additional returns based on asset appreciation in the future. Furthermore, direct investment in CRE brings back a significant portion of capital invested through current cash flows that come from rental income.
Regular cash flow can provide stabilization in times of unstable equity prices. Not to mention, much of the equity built in CRE increases through leveraging, a process in which the borrowed capital is invested to earn profits higher than the payable interest.
ASSET APPRECIATION
In general, the value of commercial real estate investments increases in the long run. This appreciation comes from market demand or by an increase in the rents of property owned. In this way, investors get an opportunity to increase their overall investment return in two ways. They can sell the property for capital gain or recognize the increased value of the asset in terms of rent. Property values rise and fall during market cycles. Commercial real estate generally withstands market fluctuations more readily than other investments.
TAX ADVANTAGES
Few investments offer tax benefits, but commercial real estate is one of them. Investing in commercial properties provides multiple tax breaks, such as mortgage interest and depreciation deduction. For instance, if your commercial property is structured and well-maintained, you may claim interest expense, depreciation deductions, and other items to defer taxes.
The IRS allows commercial real estate investors to deduct a certain amount of an asset’s depreciated value to account for the cost of maintaining the property. As per new tax laws passed in 2018, CRE investors can enjoy a 20% tax deduction on their commercial properties. As always, consult your tax advisor before making any decisions.
PORTFOLIO DIVERSIFICATION
While most investors fear inflation, investing in commercial real estate provides an inflation hedge. As property prices increase, the rental income and your investment’s value also go up. Therefore, retail investors are always protected against the immediate and long-term effects of inflation. Also, you can monetize your commercial properties as your tangible asset by renting it to business owners. Compared to stocks and bonds, investing in commercial real estate is a better option, considering the financial market conditions.
ONE OF THE BEST OPTIONS FOR DIVERSIFICATION
Given its advantages, investing in commercial real estate is one of the best options to create a diverse investment portfolio. If you’re considering this investment option, you can purchase a commercial property to create steady cash flow. At the same time, you can reduce your taxable income through depreciation allowance, even when the asset appreciates. You can boost the income yield from commercial real estate through appreciation and taxable income, making it a real and predictable source of passive income.
Commercial property is an important part of a stable investment portfolio. If you are considering diversifying into this asset class, or if you have questions, feel free to contact us and we will have one of our experts speak to you.