When it comes to diversifying your portfolio, many commercial real estate consulting firms, as well as sophisticated wealth management firms, advise investing in commercial real estate. The industry has a long history of being an attractive asset class for investors who have built up plenty of capital and are looking for new opportunities. With a good real estate consultant and other qualified advisors, there are many benefits to reap when investing in commercial real estate. Let’s see what the biggest ones are.
Simply put, commercial real estate investments offer high yields in the long term. It is because of this that returns from real estate are a lot more attractive than the more traditional ones – stocks and bonds returns.
The NCREIF, or The National Council of Real Estate Investment Fiduciaries Property Index, measuring real estate property performance, has reported a yearly return in 2015 of 12.7 percent. In the long term, the average return has been 8.8 percent during the last 15 years. Compared to Standard & Poor’s 500, that average return outperformed it by 200 basis points.
Investing in commercial real estate, i.e. buying real estate properties with retail space, can provide a steady income over a prolonged period of time. The reason why is lease agreements are distinctly different. Unlike single-family homes where rental agreements are usually 1-year or shorter, a business often needs longevity, so lease on a commercial space typically spans from three to ten years. This is especially true with retail businesses, where a stable and accessible location helps foster a strong customer base.
Another factor in income stability is that some commercial properties have flexible or multiple spaces that can be leased. By having multiple tenants, the property is hedged from scenarios where they may experience 0% occupancy.
Because of long leases and flexible rentable space, the income from commercial real estate properties is often considered more secure than that of residential properties. The income can be distributed as the owner wishes – annually, quarterly, or monthly.
So, if asking yourself “What are the primary benefits of investing in commercial real estate”, steady and secure income should be high on the list of reasons.
Equity and Cash Flow Through Leverage
Leverage represents the use of a relatively small initial amount of cash in order to gain a significantly higher return when compared to the initial investment.
When attempting to invest in properties, banks will require 30 to 35 percent in cash, related to the purchase price of the property the client is interested in acquiring. This way, the client will quickly be in a position to control a sizeable portfolio of properties by paying down loans.
As for cash flow, the increase stems from the fact that, by placing positive leverage on a property, investors multiply the amount of spendable cash by borrowing money at lower costs than the return of their property.
The simple fact is that in most markets, the value of commercial real estate investments increases over time. This kind of appreciation either comes from the market itself which increases the value of the asset or by increasing rents of the commercial property owned.
Commercial properties are closely linked with net operating income. That is because most people in the industry use that to calculate the capitalization rate (often called cap rate) to get the rate of return on the investment. This means that owners can take greater control of asset appreciation through effective property management and capital improvements.
Of course, investors can cash in on the increased value of their property is by selling it at an opportune time, when the market is right. However, the time for selling a property requires great knowledge of the market, as well as its volatile nature, which is where real estate consulting services can come in handy.
Since commercial real estate means being in possession of tangible assets, it is a great way to diversify a portfolio that solely has intangible assets. When purchasing shares of a company, there’s always a risk that it may collapse in the future, making them worthless.
When investing in any real estate property, commercial real estate properties included, there is no fear of it disappearing. It is a tangible asset, an asset investors can see and touch, and it’s not going anywhere. There may be fluctuations in building valuation over time, but the property is not going anywhere.
Hedge Against Inflation
Commercial real estate is an asset class that investors often consider to be extremely helpful when offsetting the long-term impacts of inflation.
Those who studied macroeconomics know that with economic growth comes an increase in inflation. In real estate though, this consequently means the growth of rent. Rent increase is an option available only to commercial real estate owners, and it remains one of the biggest benefits when thinking about acquiring commercial real estate.
Retaining the ability to adjust rents is what differentiates commercial real estate from all other types of assets. This possibility makes all the difference when it comes to the inflation-hedging benefits of investing in commercial real estate.
One of the biggest quality-of-life benefits you get by investing in commercial or industrial buildings is the professional relationships you’ll gain. For one, tenants are businesses that have well-defined needs and goals, so interactions and lease negotiations, and agreements are more straightforward and efficient. Because of the length of leases, the business tenant is often aligned with the owner in helping keep the property maintained or even improved.
There are many kinds of property types that fall into commercial real estate. While some investors find the various rules, regulations, and mechanics of the industry daunting, those seeking greater returns can find the challenges and lessons both financially and intellectually rewarding.
Regarding construction and renovation, the contractor and design professionals in commercial real estate are often more sophisticated than what is seen in the single-family home industry. Construction is a risky business, however, the costs of hiring qualified construction and real estate consultants can be negligible to the value they bring in keeping investors out of trouble helping them achieve greater ROI.
How Can VERTEX Help?
Investing in commercial real estate can prove to be an excellent business move, as it can provide a steady income, increase one’s equity, offer great returns, while, at the same time, serving as an inflation hedge. However, like all kinds of investing there are risks that come with this asset class.
VERTEX has a comprehensive team of construction and real estate consultants that can provide economic analysis or due diligence with property condition assessments.
This article was originally published by Xpera Group which is now part of The Vertex Companies, LLC.