14 Things EVERY Investor Should

Know About Commercial Real Estate

4 Reasons to Invest in Commercial Real Estate

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.

#1. Cash Flow

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 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.

#2. Principle Reduction

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.

#3. Depreciation

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.

#4. Appreciation

10 Helpful Commercial Real Estate Investing Tips

It is no harder to manage a large property than it is a small one. There are plenty of options available that will allow you to leverage your investment.

#1. Think Big

Commercial deals take longer than residential deals. It takes more time to purchase, renovate, lease and sell.

#2. Take Your Time

People are more familiar with residential and it is natural for them to look at apartments when considering a commercial real estate investment. Don’t overlook opportunities in office, retail and industrial even if it does take you out of your comfort zone.

#3 - Don’t Choose a Property by Default

There is a learning curve when you begin looking for commercial properties. The process of screening deals and making offers is slow at first but will go faster over time.

#4 - Be Prepared to Spend a Lot of Time at First

Obtain an understanding of Net Operating Income and CAP Rates and learn what is considered good for your area prior to making offers.

#5 - Learn New Formulas

Because Commercial real estate investments can easily exceed a million dollars establishing relationships with lenders and other investors is very important.

#6 - Relationships Are Important

Commercial loans are more difficult to obtain than residential loans. It is best to interview lenders prior to making an offer as it will make it easier to qualify for a loan when you are ready.

#7 - Find Good Financing in Advance

After your offer is accepted you will need to have property inspections, tests and appraisals to determine if you are making a good investment. These can be quite costly, but if the property isn’t what was represented to you it is better to rescind your offer than to buy a bad property.

#8 - Be Prepared to Lose Due Diligence Money

Because commercial real estate deals are million dollar investments having partners helps when qualifying for loans. Also, you can spread your risk by investing in several commercial properties rather than just one.

#9 - Partners Are a Path to Wealth

It is imperative that you associate yourself with experienced commercial real estate professionals

#10 - Know Where to Get Tough Questions Answered

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