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An Overview of Commercial Real Estate Investing

 Commercial real estate (CRE) is primarily used to generate income through rent and leases or to support business activity. Properties that qualify as CRE include office space, retail shops, hotels, and other property used exclusively for business purposes.

For those investing in commercial real estate solely to generate a return on investment, it offers investors plenty of options as well as ways to diversify investment portfolios. Besides purchasing properties like offices and retail outlets, investors can choose investment vehicles such as private equity firms that invest in real estate or real estate investment trusts (REITs). Diversification protects against losses because if one investment class fails to live up to expectations, the investors can still profit from investments in other asset classes.

Many investors turn to commercial real estate as an alternative investment to stocks and bonds. Compared to these investment, CRE can often yield a steadier income. Income from CRE investments usually comes regularly each month.

In most cases, CRE can be a good source of steady income. It’s not directly affected by general economic volatility, although real estate market swings can impact income. Also, CRE is a good hedge against inflationary pressures in the economy. In addition, during an economic downturn or recession, although income may decline, most CRE properties will still generate some income.

CRE offers investors an escape route from correlated returns, which is common with stocks or bonds. Correlated returns mean that one investment, such as a stock, is linked to how another investment will likely perform. The returns for both these investments (positive or negative) will generally move in the same direction at any given time. In contrast, CRE is generally a non-correlated investment because, typically, its performance is not directly linked to or affected by movements in other markets, such as stocks or bonds. However, income from CRE properties can be directly affected by swings in various property markets.

With potential steady returns from commercial real estate, an investor can build substantial equity over time. Equity refers to the value an investor has accumulated in a property, as opposed to the amount still owed on the property.

Another potential benefit of CRE is leveraging power. In leveraging, an investor doesn’t have to pay for a property in full, but instead finances it through debt. Leveraging allows the investor to use less of their own capital to invest in CRE, enabling them to buy more property with the same amount of money. This in turn will increase the return on investment (ROI), although this will be influenced by the cost of the debt.

The intrinsic value of a property can also be boosted through physical improvements. This can also increase its earning ability in terms of rental income. For example, in a multi-family complex, flooring or appliance upgrades can generate more income through attracting tenants willing to pay more. In addition, unlike most investment assets, a commercial real estate property may appreciate in value even during an economic downturn.

Finally, investing in commercial has several tax benefits. This includes property depreciation and mortgage interest deductions. These can significantly protect an investor’s income stream, as they reduce the tax liability.