Investment in stock markets fluctuate as in other investments, but commercial real estate has traditionally been the most stable investment. Increasing financial income through real estate is buying and renting real estate or buying re-selling the property for higher returns. Either way has advantages and disadvantages, which can create net result gains or losses for the investor.
Investment in Commercial Real Estate needs a lot of thinking and planning before making a decision and should also consider factors such as location, demand-supply, and market.
What is CRE?
Referred to as CRE, Commercial Real Estate is a piece of land or ownership of property used solely for business or workplace for commercial use.
Commercial Real Estate is a lease to tenants for conducting business; it could be commercial buildings for offices, shopping centres, warehouses, supermarkets, supplier outlets, or even shops in a residential building, usually on the ground floor, gas station, hotels, restaurants, etc.
Pros of Investing in Commercial Real Estate
There are many advantages to investing in Commercial Real Estate. Every investor looks forward to benefits from their investment.
With appropriate assets, the investors can receive:
Flexible financing – Concerning commercial real estate, there are several flexible financing options, at times, even buying properties without actually shelling out any money.
- Calculable earnings with a predictable 'Cash Flow,' i.e., profits from a real estate investment after deduction of operating expenses and mortgage investments, help build up the equity. Greater equity is the advantage of investing in more properties, thus increasing cash flow and additional wealth.
- Tax benefits: Commercial Real Estate investors can make the most tax breaks and deductions, thus saving money at taxation on loans. Generally, by deducting the economical price of ownership, operation, and property management. The taxable income on the mortgage interest reduces for the investor.
- Commercial Real Estate investors earn through rent, appreciation, and profit from business activity depending on the property. Commercial Real Estate rates tend to increase in time, and with wise investment, gains profits at the time of selling. Commercial Real Estate investments can serve as a safeguard against inflation. Rents also tend to increase over the years, which leads to higher cash flow and a stable income cash flow from the rental estate.
- Commercial Real Estate also benefits from long-lease contracts with tenants than with residential-real estate. Long-lease contracts give the commercial real estate owner large amounts of cash flow constancy, as long as the occupancy of the long-term tenants of the estate.
Leverage benefit, i.e., the investor of the Commercial Real Estate gets financial support. He or she can borrow or mortgage using the estate as a security. For buying another property, the investor has to pay only a fraction of the cost price as an advance payment.
- Professional relations - Commercial real estate investors are Limited Liability Company and invest in the property as a business. As such, the maintenance of the landlord-tenant customer relations keeps their interactions more of a friendly and professional manner.
- Professional Tenants- Professional tenants for a commercial real estate setup are mainly Banks, MNCs, or enterprises that are easy to manage. It keeps the commercial real estate investor stress free in managing the commercial Estate.
- Location and quality of the estate and the tenant: Commercial real estate investors invest keeping the location, the tenant needs, maintenance, and quality of the property in mind to get the benefit of the investment.
Cons of Investing in Commercial Real Estate
Demand, and supply, are crucial in economic performance.
- Market competition – Competition between investors and buyers, results in wasted investment opportunities and increased commercial property valuation, which could help renew financing with traditional financing, rents, vacancies, etc.
- The location and economic outlook of the place: if it is a booming locality, the demand for Commercial Real Estate is higher, and the need for tenants arises. The market depends on the potential growth of the property location.
- Loans at a high rate of interest: rely on the bank's risk assessment. Loan-to-Value involves shelling out money.
- Finding a replacement tenant is irksome when tenants leave after the lease period as the lease is unidirectional, i.e., replacement of a tenant before the lease period is impossible even though a tenant may leave.
- Management: meeting the demands of the tenants, rent factor means a lot.
Difficulty in resale- there may be less demand at the crucial point of time.
Tenant search: the size of the property matters when it comes to looking for tenants.
- Maintenance issues: the property should be maintenance issue free, which plays an important role in the Commercial Real Estate investment, i.e., conditions relating to cleanliness, hygiene, etc. of the property and the surrounding.
Pros and Cons
|Pros of Commercial Real Estate Investing||Cons of Commercial Real Estate Investing|
|Commercial Real Estate Investors command higher rental income.||Economically Vulnerable Businesses are unstable rent may stop if the economy slumps. Search for a new tenant for ongoing returns.|
|Value appreciation Renting is the option for Commercial Real Estate to earn income from the value of the estate.||Time commitment Commercial Real Estate demands time dealing with leases, maintenance, and much more.|
|Business to Business Relations Maintaining a friendly and respectful relationship between the owner and tenant leads to a long lease deal.||Commercial Real Estate investors will require professional help to handle the administration, leasing maintenance, and other concerns.|
Everyone would love to earn an additional income. Commercial Real Estate investment is a wise choice after having a family residential property. Commercial Real Estate investment is bought for an investment yielding rent an additional source of income. Commercial Real Estate investment helps as a backup for plans. Commercial Real Estate investment in a residential complex may partly benefit, but looking at the maintenance cost, a proper market locality would be beneficial. Commercial Real Estate Investment offers financial stability.
Triple Net leases refer to a concept wherein the owner if the property dies not have to bear any expenses on the property. Three Ns comprise the Net leases – Insurance on Property, Taxes on real Estate and CAM expenses – Common Area Maintenance. He will only have to bear the mortgage expenses and nothing else.
One of the major factors contributing to long term commercial property acquisition is its tax advantages that can be derived. Eventually the investor of the CRE can potentially claim the expenses done on mortgage interest, taxes levied on real estate along with the depreciation of the building. In the longer run, he may also be able to deduct the costs of maintain the property from these taxes.
While investing in Commercial real Estate, the investor may surely need lots of professional help regarding administrative, professional, legal and infrastructural help from all ends. It is also termed as conducting a ‘Due Diligence’ on the property which comprises a whole lot of investigation and verification before the property is purchased. Then the maintenance of the property also needs professional support. A reliable property manager may need to be hired to look after the continuous affairs of the real estate. Leasing and maintenance can although be handled by the investor himself, but to save time, money and inconvenience, the investor can employ professionals to upkeep the commercial real estate.
Return on Investment is the main reason and criteria for an investor to make such a huge investment in commercial real estate. There are various ways to evaluate the investing return like the following:
- Net operating income (NOI)
- Capitalization rate (Cap rate)
- Internal rate of return (IRR)
- Debt service
The core strategy for investing in commercial real estate investing is simple:
- To identify the demand for real estate in a specific area and accordingly the property is purchased while supply is still minimal.
- Real Estate is considered to be a complex yet expensive and hard to get asset class.
- To employ Due Diligence to investigate the property before buying.
- Investor must understand specific variables and general strategies to buy commercial real estate.
- Industrial property for redevelopment
- Apartment building for renovation
- Land for entitlement
Investing in Commercial Real Estate is not everyone’s cup of tea and it takes a whole lot of creditworthiness, huge finances, application of loans and finances to fulfil the never-ending demands and expenses of entering into the business of commercial estate. But the end result is quite fruitful with the kind of return on investment that is potentially advantaged by CRE is not there in any other acquisition of property. Taxation assistance, generating and surplusage multiple businesses and investment strategies correlated with borrowed capital is a niche that is achieved by acquiring Commercial Real Estate and it has proved quite advantageous for many who have entered into the business. This is trending and is much popular than investing into residential properties in India.
- Why invest in Commercial Real Estate
- How to Get Started in Commercial Real Estate Investing
- Pros & Cons of CRE Investing
- Why is Commercial Real Estate So Expensive
- should I invest in commercial real estate
- Features of a Profitable CRE Investment
- How to Make Money in Commercial Real Estate