By Anita Clinton
1. DIFFERENT TYPES OF TENANTS
Commercial property tenants are different from those in residential units. They are usually business owners that are leasing space for their businesses. Therefore, they are more inclined to take care of their units for the sake of their customers. In addition, they tend to be more financially stable and are less inclined to miss rental payments or break their lease.
2. LESS HANDS-ON
Managing multi-unit commercial properties requires less hands-on attention than managing multi-unit or multiple residential properties. You don’t have to worry about midnight phone calls about stopped up toilets. In addition, if you hire professional property management, they charge less of a percentage to manage commercial property.
3. LONG-TERM & TRIPLE NET LEASES
Commercial leases are usually long-term, 5-10 years. In fact, larger companies like Wal-mart and Walgreens sign 20+ year leases. In addition, triple net leases are also optional where the tenant pays rent, property taxes, insurance, and maintenance expenses.
4. TAX DEDUCTIONS
Investors in commercial real estate can offset the income from the investment through tax deductions from the depreciation of improvements – parking lots, buildings, equipment, etc. IRS rules allow nonresidential properties to be depreciated over 39 years. Additional deductions can also be taken for the interest paid toward the mortgage.
5. TAX DEFERMENT OPTIONS
Like residential properties, paying taxes on capital gains from the sale of commercial real estate can be deferred by purchasing another
“like kind” property. The investor can continue to sell properties for a profit and defer taxes indefinitely.
6. LESS VOLATILE MARKET
Currently the residential real estate market is extremely volatile, due to the abundance of properties that have saturated the market and the changes in the mortgage industry. On the other hand, the commercial real estate market has barely been impacted by those changes.
7. OPTIONS FOR SMALLER INVESTORS
New forms of ownerships like Tenants In Common (TIC), Passive Investment Syndications, and Real Estate Investment Trusts (REIT) have opened the doors for smaller investors to invest in commercial real estate. TICs allow investors to own fractional shares of larger real estate projects. Passive Investment Syndications allow smaller investors to passively invest in larger real estate projects. And last, but not least, REITs combine the concepts of real estate investing and the stock market. Investors purchase shares of stock that invest in large real estate projects.
8. HIGH DEMAND = HIGHER VALUE
Because of the increased opportunities for smaller investors to participate in commercial real estate, the market is becoming more competitive. As a result, an increase in demand is followed by an increase in value. Hence the basic economic components of supply and demand.
9. FINANCING LEVERAGE
Financial leveraging for commercial property allows investors greater returns on their investment. In a $500,000 investment, with a $100,000 (20%) down payment, the investor could receive a return on both the $100,000 down payment and the $400,000 financed amount. Therefore, if the investor obtains a 9% interest rate on a $400,000 loan and the property yields a 12% return, the investor would receive a $24,000 annual return. (12% of the $100,000 initial investment and 3% [the difference between the 12% return and 9% interest on mortgage] of $400,000 financed amount.)
10. LUCRATIVE PROFITS
Commercial real estate, on average, generates 50%-100%+ more income than residential properties. Investors generate income from rents, appreciation, and profit on the sale. Currently, commercial units are being rented for $8-$30 per square feet in the Chicagoland area – you do the math!
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