Investing in commercial real estate is one of the best investment decisions that can yield significant financial returns, stable income, inflation hedges, tax advantages and diversification, among multiple other benefits. Whether this is your first commercial real estate deal or you are already an experienced investor, it’s critical to understand the key advantages of investing in commercial real estate. Here are five key reasons why you should invest in commercial real estate

1. Stable Income and Financial Returns

Commercial real estate is traditionally known as a stable asset class. While the macroeconomic backdrop can impact property valuation, commercial real estate over the long term is a relatively safe investment. That’s why investors prefer commercial real estate investing—stable income and financial returns. Why? Commercial real estate properties such as multifamily, office, retail, industrial and other properties include long-term lease agreements that can last from one year to ten years or more. For example, while a multifamily tenant may rent a property for a one year lease term (with the potential to renew), a retail tenant could sign a 20-year lease. A longer-term lease provides real estate investors with a stable, recurring and predictable income stream. This makes commercial real estate an attractive long-term investment. The predictability of monthly cash flow – which often includes annual rental increases – provides ongoing and regular payments to investors. 

2. Power of Leverage 

If an equity investor purchases a stock, the investor typically uses cash to purchase the securities. With commercial real estate, however, investors can access significant leverage through bank debt or private lenders, for example. This means that investors can borrow capital to fund the purchase of commercial real estate properties, which can significantly increase the potential financial return of the investment. Relative to other asset classes, banks view commercial real estate as relatively safer. Why? Commercial real estate typically generates stable income that is recurring and longer-term. This provides banks and other lenders with more comfort, which makes them more willing to provide financing to commercial real estate investors. With leverage, investors can purchase multiple properties with a smaller equity contribution and use borrowed capital to fund the purchase price. This leverage enables investors to not only collect rental income, but also enjoy the benefits of capital appreciation. 

3. Inflation Hedge

Simply put, commercial real estate is one of the best hedges against inflation. Why? Unlike other assets, commercial property values increase their valuation in periods of high inflation. Commercial real estate owners and operators can raise rental rates as inflation increases and cost of living rises. This means investors can collect more recurring income as rents rise. This not only provides a cushion to real estate investors during inflationary periods, but it also preserves their investment. With higher rental income, property values can increase. Higher rental rates also can lead to more cash flow, which allows commercial real estate investors potentially to pay off debt faster. As a result, investors can increase their equity in a property, which provides additional financial security. 

4. Tax Benefits

Tax benefits are one of the main reasons that investors prefer commercial real estate as an attractive financial opportunity. For example, real estate investors can deduct depreciation, which a non cash expense that represents the decrease in value of a property over time due to wear and tear. For example, commercial real estate investors can deduct depreciation on the building (but not the land). How does depreciation help real estate investors? Depreciation lowers your taxable income, which means as a property investor, your tax liability decreases. However, since depreciation is a non-cash expense, depreciation doesn’t lower your cash flow. This is an important concept. In commercial real estate, investors can collect positive cash flow while also lowering their taxes through depreciation. Plus, even though the tax of the property is lowered through depreciation, the value of the property can still appreciate. In addition to depreciation, investors can deduct multiple other expenses, which also lowers your taxable income. For example, investors can deduct property management fees, maintenance costs, property taxes and insurance, among other potential expenses. Commercial real estate investors also can benefit from capital gains taxes, which typically are lower than ordinary income tax rates. When investors sell a commercial real estate property, they also may be able to complete the transaction tax-free—such as through a 1031 exchange—if they meet certain conditions.

5. Diversification Advantages

Many investors flock to the stock market when they want to generate significant returns. However, high risk can accompany high returns. Including commercial real estate in your investment portfolio can provide an outstanding opportunity for diversification. Real estate generally has a low correlation to stocks and bonds, which means real estate valuations don’t trade in sync with public stocks and bonds. So, investors who purchase commercial real estate properties can reduce the overall volatility of their investment portfolio, which can lower overall risk and smooth out returns over time. The opportunity for stable growth can protect commercial real estate investors from the regular market fluctuations that stock and bond investors are susceptible to, making commercial real estate a compelling investment.

Conclusion

From stable income and tax benefits to diversification and inflation protection, commercial real estate is one of the most attractive asset classes for discerning investors. By understanding the advantages of investing in commercial real estate, investors can access stable and recurring income, capital appreciation and economic downside protection. Choosing investors who understand real estate dynamics, conduct thorough due diligence, and who have a seasoned team can best help investors meet their investment goals.