Commercial real estate is considered to be an illiquid asset. This means that if you invest your money in it, you cannot access it easily. Although this might be a drawback, it can also be beneficial.
While you cannot sell it as quickly as other types of investments, it has the potential to make you more money in the long run. Another benefit is that it is not affected by daily price changes like stocks. But, it can be harder to start investing in commercial real estate. This is because it often requires more money upfront.
Investing in real estate can be very rewarding; however, it is essential to understand the risks involved, especially if you are new to it. This piece covers how to invest in real estate and more.
Steps to Begin Your Journey in Investing Commercial Property
Before starting commercial real estate investing, there are some questions you need to have answers to. Questions like, How much do I need to invest in commercial real estate? Are industrial units a good investment?
Jeff Bartel, the chairman and managing director at Hamptons Group, an alternative investment and advisory firm, said that one should decide whether to invest with others through crowdfunding or buy a single property on their own.
If you choose crowdfunding, Bartel further advises that you check the background of the company you are investing with. Ensure you understand your rights, like whether you can withdraw your property funds from the investment early or if you have to wait.
If you are buying a single property, he suggests that you look for special features that make the property more or less appealing. It would be best if you also watched for trends in the area where the property is located that could be a problem later in the future.
As a beginner, you should know how to invest in commercial property. Many people who invested in commercial property started by investing in single-family homes. Paul Getty, president and CEO of First Guardian Group in San Jose, California, says more than 90% of commercial real estate investors begin with single-family rentals.
These investors learn the basics, build wealth, and then move to larger commercial properties. Even though residential real estate differs from commercial real estate, starting with homes can teach you a lot and help you prepare to invest in commercial properties.
Another option is the use of technology. New apps like Fundrise and CrowdStreet can help beginners start investing in commercial properties.
They offer educational tools and ways to connect with experienced investors. According to Getty, the technology and resources available today make learning how to invest wisely and avoid mistakes easier.
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Commercial Property Investing: Balancing Risks and Rewards
Commercial property investing has many distinct advantages. However, like every other investment, it has pros and cons. The pros and cons of investing in commercial property are similar to the risks and rewards.
Every investment involves some risk, and commercial real estate is no exception. Even though the economy has improved, the pandemic has affected various commercial properties over the past years.
Steven Buss, founder of Likewise Partners, explained that long-term leases are an essential part of commercial real estate. A long-term lease means a business rents a property for many years. This protects the property owner from short-term changes in the economy. Simply put, the longer the lease, the more predictable the income, which makes the property more valuable.
Real estate loses value over time because buildings age and need management. A tax rule allows commercial property owners to reduce the value of their property on their taxes every year. This is called depreciation.
The rule helps property owners save money on taxes, which can be used to fix the property. The IRS allows depreciation over 39 years for properties that are not homes. This means the owner can get significant tax savings over a long time.
Another benefit of investing in commercial real estate is the 1031 exchange. Usually, when you sell an investment, you have to pay a profit tax, known as capital gains tax. However, the 1031 exchange allows real estate investors to avoid paying the tax rate if they use the money from selling one property to buy another. This means they will have more money to invest in their next property.
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When Is the Right Time to Invest in Commercial Property?
According to experts, the right time to invest in commercial real estate is when interest rates are very low because borrowing money is cheaper. For example, if you have a small amount of money, like $25,000 to $50,000, you could get a loan to buy a $200,000 property.
The advantage here is that you can use a little of your own money and borrow the rest. This will allow you to grow your investment faster with the help of bank money. Investors who get loans at these low interest rates can keep them locked in for several years. This means they do not have to worry about rising interest rates, which helps increase their profits after paying off their debt.
Another period that experts think is the best time to invest in commercial property is when the stock market is stable. Usually, when the stock market is stable, the government provides a lot of financial support to the economy, and there is access to information that can help investors make smart decisions.
Knowing the trends in commercial real estate is essential when identifying investment opportunities. The industrial sector is one central area of commercial real estate that is growing fast. This sector includes warehouses and storage facilities.
The rise of online shopping drives the growth of this sector. This causes more companies to need more space to store and ship products, which is good for commercial property investment. On the other hand, retail space, like malls, has struggled during the pandemic. However, there are still chances for good returns, especially if these places are used for distribution centers.