5 Reasons Why Commercial Real Estate Is a Smart Investment in 2020
February 1, 2020
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5 Reasons Why Commercial Real Estate Is a Smart Investment in 2020
Hot Economy Creates U.S. Real Estate Opportunities for Foreign Investors
The U.S. real estate market has been booming in recent years. Lower interest rates, favorable regulations, and infrastructure improvements have all played an important role in generating investor confidence in the real estate sector.
Demand for commercial real estate has been particularly high as more individuals and businesses are looking to lease properties in high-value neighborhoods. Investment in commercial properties can be a great way to earn a high rate of return and diversify your portfolio.
In general, there are five main reasons why commercial real estate is proving to be a smart investment for any investor.
1. Strong Returns
Commercial real estate has historically provided consistent returns across the Core, Core Plus, Value-add, and Opportunistic strategies –ranging from 7 percent to 15+ percent–even during economic down turns.
One of the many reasons why commercial properties are a smart investment include the potential for multiple income sources, like collecting rental income from tenants and the appreciation of the property value over time.
If the property is located in a commercial district and used for business purposes, like an office building, the rate of appreciation tends to be higher. However, even residential properties like apartment complexes and condominiums appreciate in value significantly over time.
“We have consistently seen strong returns for our investors across various commercial property investments including multifamily residential, office buildings and hotels,” said Francis Lively, Chief Executive Officer and President of The LCP Group, L.P., a 45-year-old real estate investment management firm based in New York. “By diversifying our portfolio and implementing conservative underwriting and due diligence practices, we have sustained a successful track record over the decades.”
2. Stability of Income
Typically, commercial real estate markets are not as volatile as some other investment options. Stocks, forex, and commodities, like gold or silver, can rise and fall significantly within a matter of days. And it’s not uncommon to see a company’s stock fall drastically in a single day because of market rumors. Conversely, the value of a commercial property is very unlikely to fall by that much that quickly.
Often the U.S. commercial real estate market proves to be more stable than the stock market. So it’s no surprise that international investors have been increasingly investing in U.S. commercial real estate to protect their capital from the instability in their local markets.
“We have experienced a large influx of foreign investors that, for many reasons, want to invest in commercial properties here in the U.S.,” said Lively. “Of course, a primary reason is to diversify their investment portfolio, but we also have many investors interested in the EB-5 investor visa program.”
Naturally, since property values don’t fall significantly in a single day, they don’t rise in a single day either. Investment in commercial real estate is typically a longterm investment strategy, and there is typically not much to be gained by opportunists who follow a quick-in, quick-out strategy.
When investing in a commercial property, be prepared to commit for at least three to five years.
3. Inflation Hedge
Market inflation causes the dollar value of your savings to erode over time. In order to prevent this from happening, your assets should earn you greater profits than the rate of inflation.
During the past 10 years, the rate of inflation in the U.S. has been between 2 percent and 4 percent. Given that the rate of return on savings accounts averages between 0.5 percent and 2.5 percent, a savings account is a losing proposition since you would earn less than the value your money loses due to inflation. By contrast, long-term commercial real estate returns have averaged 9.5 percent, which beats the inflation rate allowing wealth to increase over time.
According to a Forbes article, real estate investments can be considered a great hedge against inflation due to the increase in rents when they reset at the end of a lease and since property values appreciate in value over time typically at a higher rate than inflation.
4. Tax Advantages
Investments in commercial real estate may also provide several tax advantages to investors. Expenses incurred from property maintenance or improvement, insurance premiums, and even marketing costs may be deducted against your rental income to lower your overall taxable income.
You also may be able to deduct depreciation expenses on the property. As outlined by IRS Code Section 179, depreciation is an annual income tax deduction that allows you to recover the costs of certain property over time. It is basically an allowance for the wear and tear, deterioration, or obsolescence of the property. Except for land, most types of tangible property can be depreciated, such as buildings, machinery, vehicles, furniture and equipment. And, certain intangible property can be depreciated, such as patents, copyrights and computer software.
In addition, if you sell a property for more than what you paid for it, the difference between what you paid and what you sold it for is recorded as a capital gain. If you buy and hold a property for more than one full year, you may be able to calculate the tax as a long-term capital gains tax at a rate of 15 percent or 20 percent. Capital gains tax rates are generally lower than salary tax rates that may go up to 37 percent.
5. Portfolio Diversification
Heavy investment in stocks and other securities alone may put you at risk should the market collapse. Experienced investors typically include real estate in their portfolio to protect against unexpected market crashes. In general, investment in real estate helps diversify your equity portfolio by spreading your risk, and it is ideal for investors with a low affinity for risk.
Overall, investing in commercial real estate has a lot of advantages that may be worth considering. And quite frankly, it’s just fun. Since there is a tangible asset that you can actually see and touch, it can prove to be more exciting that other types of investments.
So whether it’s for the strong returns, the tax breaks or to diversify your portfolio, commercial real estate is a smart investment for many investors.
