Is Commercial Real Estate A Good Investment?
Have you ever heard the Chinese proverb that reads like this – ‘the best time to plant a tree was 20 years ago. The second best time is now?
I bet you’ve come across that before.
Interestingly, the same seed sowing principle behind that proverb applies to commercial real estate investment.
Now imagine what would have happened if you started investing in commercial real estate 20 years ago? But here you are, considering whether it is a viable investment in comparison to every other alternative within your reach.
Though I have no idea of who you are or where you are coming from. The clear fact is that you want to start putting your money to work for you. That’s probably the thinking behind your decision to read this post, starting with a specific question. In addition to answering that question, we’ll look into the potential advantages of commercial real estate investment and other interesting considerations.
What Is Commercial Real Estate?
In simple terms, it is a piece of real estate property used for business-related activities or a commercial workspace.
Most times, commercial real estate may include properties like office buildings, shopping malls, storage warehouses, and a piece of land. From an investor’s perspective, commercial real estate is used primarily to generate profit. Below are the two best ways to achieve that.
How Commercial Real Estate Produce Profits
Rental Income – When this type of property is rented, it generates income. After deduction of all operating costs and taxes, the remaining income is will be recorded as profit. Here is the most common and simplest way that commercial real estate properties produce profit for their owners and investors. The size of profit will depend on the nature, size, location, and value of the property.
Capital Gains – This refers to the increased value of a real estate property over a certain period. However, the real capital gains can only be realized when a commercial property is resold.
Again, what remains after the deduction of operating costs, transaction fees, and taxes will be recorded are profit. Regardless of geographic location, most people are leveraging real estate investments to grow their wealth based on the potential for value appreciation.
For example, if a commercial property was bought at $100,000 and resold for $130,000 within 12 months, you can say that it has recorded 30% capital gain or value appreciation. Let’s move to the big question – why is commercial real estate a good investment?
Benefits of Commercial Real Estate Investment
#1: Passive Income
Here is one of the biggest benefits of investing in commercial real estate. The potential income can be more passive than many other comparable sources. Talk about having your money work for you while you are busy doing other things, commercial real estate investing is one of the best options to consider
Whether you own the properties directly or invest through a distinct registered corporation, you don’t have to spend your time actively working to make the property earn profits.
In some cases, you may want to hire professional estate management companies to help you take care of the work involved. As noted earlier, passive income from commercial real estate often comes through rental income paid by the tenants operating as independent businesses.
#2: Property Value Appreciation
Unlike some other assets, most commercial real estate properties don’t require active human labor to appreciate or grow in value.
Even though value appreciation is subject to market dynamics, long-term ownership of commercial real estate properties often guarantees value appreciation to a large extent. Historically, this benefit of cumulative value appreciation has been proven in real estate more than in any other industry.
Besides, it’s the same reason why some individuals and other commercial entities buy and resell real estate properties from time to time. In other words, these people are taking out profits from previous investments that increased in value.
#3: Less Turnover
Comparatively, residential properties often have higher turnover when compared to commercial real estate.
The reason for this is based on residential property contracts known to be historically shorter regardless of the location. Another interesting fact about this turnover factor is that it takes time and money to fill up properties after each residential rental cycle.
In other words, less turnover means higher income stability for commercial real estate investors. We all know that vacant properties don’t earn rental income.
#4: Better Valuation Process
When compared to residential properties, valuation is faster and more objective. In the commercial segment, it is easy to request the income statement from the current property owner.
With that record, it becomes easier to evaluate the property’s past and future earning potential. Instead of emotion and intuition, the valuation of commercial real estate is usually based on market data.
To a large extent, that ease of valuation is one of the factors influencing the speed of sales and transaction frequency in the commercial segment. As an investor, it is easier for you to understand the value dynamics before diving in with your money.
#5: Low Entry Barrier
Like some other people, you might have believed that investing in commercial real estate requires a high amount of money. While this is true to some extent, the times are changing.
High investment capital requirement is no longer a barrier to entry. If you are serious about your consideration of this investment, you can begin to explore some other options like the ones mentioned below.
Real Estate Investment Trust – It is a special purpose company that develops, buyers, owns, manages, and sells real estate properties. Some of these trusts are focused on commercial real estate investments, and the entry capital is lower than buying properties directly.
Tokenized Real Estate – This is an investment vehicle in which units of real estate ownership are divided and issued through virtual tokens. Tokenization of real estate, in this case, is based on the emergence and feasibility of blockchain technology. Like other virtual tokens and cryptocurrencies, tokenized real estate can be bought with lower amounts of money.
Investing in real estate is generally good. But when you want to take a vantage position, you should consider the commercial segment. Beyond capital gains or value appreciation, commercial real estate can give you access to stable rental income.
The best part is that you don’t have to deal with residential tenant management headaches and costs.
Since you didn’t start commercial real estate investing 20 years ago, the second-best time might be now; not later.