Is Investing In Commercial Property A Good Investment?

When it comes to real estate investment, what comes to your mind, Commercial or Residential? Investors investing in residential say it is a less risky option, but those who favor commercial will argue that it is safer due to its continuous cash flows. Which one do you prefer? The smart ones will check which fits into their portfolio.  

Commercial real estate investing is different from stock investments, although it also has its own risks and challenges. Investors show interest in it to diversify their investment portfolio. The appeal is to invest in different types of asset classes or property types and to get tax advantages. 

Let’s dig into commercial real estate investing.

Points to be covered: 

  • What is commercial real estate?
  • How can you invest in commercial real estate?
  • Pros of investing in commercial real estate
  • Essential vocabulary for commercial real estate investing
  • Summing up 

What is Commercial Real Estate?  

Commercial real estate refers to properties that are primarily used for business or income-generating purposes rather than for residential purposes. Many people misunderstand that buildings settled by businesses are only considered commercial real estate, but CRE widely includes the land that is used to yield profits or income. Businesses, investors, or developers typically buy, lease, or develop these properties for various commercial activities. 

Properties that are recognized as commercial real estate include:

– Office Buildings

– Retail properties

– Industrial buildings or spaces

– Hotels and hospitality properties

– Hospital facilities and medical buildings

– Warehouses or storage spaces

– Apartment buildings or multifamily properties

– Restaurants 

How Can You Invest in Commercial Real Estate?  

There are two primary ways to invest in commercial real estate– Direct investments include owning property directly or via an entity such as a real estate LLC or partnership. Purchasing shares in a firm that owns properties, such as a REIT or real estate crowdfunding, is indirect investing. 

Direct Investment:  

This investment is well-suited for investors with high net worth and who want to manage their property themselves or work with a property manager. 

– Control over decisions about the property

– Tax benefits

– Flexibility in choosing which property to buy  

Indirect investment: 

Investors want to start investing with a small amount of their portfolio or want passive income and automatic diversification of their portfolio. 

– Start with a small amount of investments

– Instant diversification to the portfolio

– Experienced approach to the properties 

Points to be considered before choosing the right method of investing: 

– Access to quality commercial real estate funds open to additional investors.

– Minimum amount needed to invest and amount of money you must invest.

– A-REIT or unlisted fund that provides cash flow for commercial real estate.

– You need liquidity to cover your financial condition. 

Pros of Investing in Commercial Real Estate

Market fluctuation and ups-downs in the price of stocks or bonds is a bitter truth every investor must face. However, even when the market fluctuates for one reason or another, commercial real estate (CRE) investment remains the same, thanks to its stable nature. Investing in CRE offers assets that can provide cash flow and appreciation. 

Stable Income: Most investors believe holding an asset over time is better than jumping in and out chasing gains. Commercial real generates stable cash flow in this asset-holding process, generally distributed annually, quarterly, or even monthly. This rental income is a great investment return for retirees or ones with volatile income sources.  

Inflation Hedge: Commercial real estate investments can act as a hedge against inflation. Property rents and values often increase as the cost of living rises, allowing you to maintain your purchasing power. This is quite the opposite of other investments, such as bonds and stocks, in which inflation results in diminishing returns.  

Tax Benefits: There are several tax advantages associated with commercial real estate investing. You may be able to deduct expenses such as property management fees, maintenance costs, and mortgage interest. The best part is that you can often benefit from depreciation deductions that can offset rental income for tax purposes. 

Essential Vocabulary for Commercial Real Estate Investing 

If you are new to this market or in the process of learning commercial property investing, you must know the terms. Knock up and check what you know or how much you know:  

Net operating income (NOI): Gross rental income minus expenses.  

Cash on cash return: Annual cash flow divided by the cash you’ve invested into your property.  

Cap rate: NOI divided by the purchase price of the building.

Debt coverage ratio (DCR): NOI divided by your annual debt payments. 

Zoning: Zoning regulations dictate the allowable types of buildings or businesses within a specific area. They govern land use and development. 

Building Classification: Buildings are categorized into Grades A through D, representing their quality and location. Grade A signifies the highest quality and desirability. 

Build-to-Suit: This refers to properties developed to meet the specific requirements of a tenant, tailoring the space to their needs. 

Triple Net: In a Triple Net lease, tenants not only pay rent but also assume responsibility for normal operating expenses like utilities, property taxes, insurance, and maintenance. 

Common Area Maintenance (CAM): CAM costs encompass the expenses associated with operating a building, including shared spaces. These costs are usually distributed among tenants based on their leased square footage. 

Parking Ratio: The parking ratio is determined by dividing the total rental square footage of a building by the number of available parking spaces. Many leases specify the allotted parking spaces for each tenant, especially in office properties.  

Summing up Investment in commercial property development projects is the best option for those who are looking to diversify their portfolios. We at Cobalt Corp welcome sophisticated investors to KINGS CLUB, a club for sophisticated investors only. It is a place to grab the right opportunity at the right time. We promise to provide our members with a unique environment where investors can access sophisticated opportunities that everyday people cannot get access to. For a start, give us 16- min, and we will show you how sophisticated investors are making their money work harder. Click here to browse our video.

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