Buying a commercial property requires finding the right property, securing financing, and hiring professionals. However, this investment offers high returns on your money. Compared to investing in real estate, the returns from commercial property are more elevated than residential property. Furthermore, the money you invest in commercial property is tied to a tangible asset, unlike other investments.
Rent Per Square Foot
Rent per square foot for commercial property is a measurement of the cost of a building’s rent. A tenant typically contributes around $2 for every $7 in revenue. This isn’t always the case, though. For example, a landlord may occasionally determine rent based on “useful square footage,” which includes communal areas.
Different types of commercial properties cost different rent per square foot. For example, Commercial Real Estate Denver area can cost as much as $28 per square foot a year, while a more modest retail space in a less popular neighborhood can be less expensive. The average rent for a one-hundred-five-square-foot commercial property in the United States can range from $15,000 to $42,000 per year. This translates to $1,250 to $3,500 a month. This is why investing earlier will benefit you from accumulating income from assets without having to do anything.
Tax-Efficiency
When investing in commercial property, you should maximize the tax efficiency of the deal. The depreciation expense you take on your investment reduces your tax liability. For example, if you invest in a building that costs $10 million, you can deduct $2 million from its value. This translates into a tax savings of $35K in one year. Over several years, the savings can be substantial.
This tax efficiency rewards equity holders, who take on a more significant risk than lenders. Before deciding on an investment opportunity, remember to compare the funds’ pre-tax returns. A fund that offers a lower pre-tax return may be more profitable than one with a higher tax bill.
Due Diligence
Due diligence is a critical component of the purchase process for a commercial property. A buyer can minimize the risk of unforeseen problems by evaluating critical aspects before closing the deal. For example, a building with a faulty HVAC system could mean tens of thousands of dollars in repairs. Likewise, a title search could reveal a previous owner’s name on the building.
In addition to the property inspection, a purchaser should conduct an environmental assessment to ensure the property is safe for human habitation. The investor will hire a structural engineer to fix the problem if a property inspection reveals significant structural damage. Such damage can make the deal unprofitable. The ability of civil engineers to assess whether the soil is solid enough to support a building in the future makes them an essential component of the due diligence process. They also frequently operate the connecting utilities, which are crucial to the agreement’s success.
Market Cycles
A market cycle refers to an economic expansion or a downturn in a given asset class. Investors can take advantage of either phase for a variety of reasons. In addition, they may choose to invest aggressively in real estate, while in a downturn, they may be more defensive. Timing the market is often complicated, and the most successful strategies may involve an intelligently-constructed portfolio of long-term investments with appropriate risk-return characteristics.
Market cycles in commercial property investment are incredibly complex and constantly changing. Because commercial real estate is a highly localized business, “market conditions” vary widely from market to market. For instance, a market in Omaha, Nebraska, will have significantly different conditions than one in New York City. This is because other markets are at various stages of the real estate cycle.
Diversification
The famous investment slogan, “don’t put all your eggs in one basket,” applies here. Having a well-diversified portfolio is essential to avoid total loss. In general, diversification in real estate investment is a good idea. It will protect you from any investment failing or one asset class doing poorly.
Diversification in commercial property investment means investing in multiple real estate types. Each type offers benefits and risks. An investor might, for instance, invest in a retail space, an office building, a multifamily apartment building, or a multifamily housing property. Profits can rise, and risk can be reduced as a result.
Appreciation Potential
When buying a commercial property, you have several different choices. Commercial properties are an excellent choice for several reasons, including the fact that they offer an excellent return on investment. In addition to providing an excellent return, commercial properties are typically more stable investments, meaning the risks are lower than buying a single-family home.
The key to understanding commercial property appreciation potential is looking at local market conditions. For example, if there’s a high demand for space, market rents are likely to increase. However, the honest answer to this question is the income approach, which considers how much rent or income is generated from the property. Lastly, the property must have adequate infrastructure to support current and future demands.
No Comments