Direct ownership of commercial real estate is becoming popular amongst investors because of extremely low interest rates and property prices that have yet to fully recover. If direct ownership doesn’t sound like an investment you’re interested in, you can still get involved in real estate through publicly-traded REITs. However, commercial real estate provides you with the opportunity to own real assets to combat stock market volatility, capital appreciation, and yield. Follow these tips if you’re entering into commercial real estate investment for the first time.
Without deep diligence, you won’t last long in the industry. Sellers don’t disclose everything even though they are supposed to, so you need to play investigator. Examples of deep diligence include reconstructing P&L statements on the property, factoring in vacancy rates, plus inspecting the roof, heating and cooling system, and much more.
Commercial real estate investors need to be in it for the long haul. Most experts suggest that you need to own a property for at least a decade to account for all the peaks and troughs in the market. For example, those that bought commercial real estate just before the crash are in deep trouble right now but eventually, the value of their investment will rise. Besides, if you are renting out the property, enough cash may be generated to cover expenses, insurance, taxes and repairs. Even in a recession, commercial properties can yield a profit.
Before paying for a commercial property, you need to decide how much work you wish to do and how much will be passed off to others. For instance, if you plan on renting out the property to tenants, will you be the one to find them and deal with their queries and/or complaints? In all likelihood, you will be better off hiring a property manager to take care of things. It is also a good idea to keep rent slightly below market rates to increase your chances of getting long-term tenants. When dealing with non-paying tenants, there will be occasions when releasing them from the lease and writing off the outstanding rent is better than going through an expensive eviction order.
Know Your Tax Liability
The tax reform act of 1986 ensured that commercial real estate could no longer be used as a form of tax shelter. When buying commercial property today, you’ll have to include the possibility of tax increases in your budget.
Get into the right frame of mind and understand that commercial real estate is a wonderful opportunity to increase your net wealth by adding stability to your investment portfolio. Once you make the purchase, remember that it is a long-term commitment and don’t panic if the market takes a hit, because as history has shown… it will always bounce back.
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