There are four compelling reasons to invest in commercial real estate as an alternative to such traditional investments such as stocks and bonds.
1. Cash flow—Cash flow is the most obvious of the reasons to invest in commercial real estate, and is what people are generally referring to when they remark about making “your money work for you.” Whether we are talking about retail, office, industrial, or multifamily, commercial real estate investments produce cash flows and that is what you are buying … future cash flows generated from rent.
2. Principle reduction—Principle reduction may be a less obvious reason to invest in commercial real estate but long term it could be the most powerful reason to invest. The fact is your tenants who are paying you rent are in fact making your mortgage payments for you. Their rent is reducing the principal that you owe on the property building equity and increasing your net worth on a monthly basis.
3. Depreciation— Depreciation is a phantom expense on the profit and loss statement that lowers the taxable income resulting in lower taxes. Currently you can depreciate commercial property over 39 years and 27.5 years for residential and multifamily properties. There is one thing to remember about depreciation, however, it only delays taxes and upon the sale of the property you will pay cost recapture on the amount depreciated unless you elect to execute a 1031 Tax-Deferred Exchange to delay this taxation further.
4. Appreciation—Appreciation is simply commercial real estate going up in value over time. This increase in value can come from the overall improvement of the market, repositioning of the property through capital improvements or proper management of the investment that increases the net operating income of the property.
While each asset class of commercial real estate behaves differently, these four reasons to invest in commercial real estate remain consistent.
CEO, Employing Broker
Katchen Company, founded in 1962, is an integrated real estate company with its corporate headquarters inLakewood,Colorado. The company offers real estate development, redevelopment, property management, brokerage, consulting services, construction oversight and maintenance services to individual and institutional real estate investors throughout the greater Denver metropolitan area in Denver with satellite offices in Chicago, Las Vegas and Miami market areas.