Thinking about investing in commercial real estate? This can be a very exciting and rewarding endeavor, both financially and personally. Many investors get started in commercial real estate investment with the goal of securing more wealth.
However, commercial investment properties also offer other benefits: portfolio diversification, mitigated economic risks, and a sense of pride in knowing that your commercial property plays a role in benefiting the local economy and community.
Smart investors know that diversification is essential to a well-rounded asset portfolio. If you have already invested in stocks, bonds and even residential real estate, investing in commercial real estate is an excellent way to strengthen and secure your portfolio.
Compared to assets like stocks and bonds, real estate is considered a “hard asset.” This means it is a tangible asset you can actually touch, see and directly control. Unlike “soft assets,” there is no risk of the property suddenly disappearing overnight due to a financial crisis or scandal.
Even within the scope of commercial real estate investing, there are ways to diversify. For example, you may choose to invest in multiple commercial properties that serve different functions; perhaps an office space and retail space, which will be impacted in different ways by economic changes.
2. High Returns
Compared to residential real estate, commercial properties tend to offer a higher return on investment; around six to twelve percent, versus one to four percent. These numbers are also higher than the average returns for traditional investments in stocks and bonds.
Part of what contributes to these excellent returns is the lower vacancy risk associated with commercial properties. If you own a retail, office or apartment space, you typically collect rent from multiple tenants each month.
If one tenant suddenly ends their lease, you will still have the safety net of income from the remaining tenants to fall back on. Most asset types—including residential real estate—do not offer this same safety net.
3. Cash Flow
Not only do commercial properties offer the potential of future financial gains, they also contribute to present cash flow via rent collected from tenants. If the property does in fact gain value over time, this appreciation will deliver an increase in cash flow as well.
Ultimately, these benefits are exactly what investors seek to gain when purchasing a commercial property: an investment in future wealth, along with immediate ongoing cash flow that may remain steady or rise over time.
4. Long Leases
Commercial leases tend to be longer than residential leases, which is a major benefit to the property owner. Dealing with tenant turnover isn’t just a hassle; it can actually hurt your income potential, too.
Many commercial tenants sign multi-year leases, which mitigates a large amount of turnover risk. These long-term rental agreements lend themselves to steady operating income, which contributes to the higher returns and cash flow that we previously mentioned.
5. Inflation Hedge
An inflation hedge is a type of investment that is intended to protect the investor against the decreased purchasing power of money that results from rising prices. In general, hard assets serve as a good hedge against inflation, as they tend to hold (or increase) their value over time—even as prices for consumer goods and services rise.
If inflation does occur, commercial property owners have the power to offset those rising costs by increasing rent. In this way, commercial real estate can actually benefit from inflation over time.
CRESCO, a leading specialist in commercial real estate, also offers investment property advisory services, including valuation and tax advisory, acquisition and disposition and consulting services. Contact our team for more information.
To learn more about how CRESCO, Greater Cleveland’s leading commercial real estate company, can help you with your property needs, contact us at 216.520.1200, or fill out the form below. A CRESCO professional will contact you shortly.