Real estate can be a great way to achieve that for investors who want to build wealth over the long run. Although real estate can offer numerous tax benefits, it’s important to consider the right strategy when it comes to investing in commercial or residential properties.
Some investors who are already familiar with residential properties may want to expand their horizons and enter the commercial real estate market. Others may be a bit nervous about investing in commercial real estate. Before investing in commercial real estate, it’s important to consider the long-term goals of the investor and the potential returns.
What’s Commercial Real Estate?
A commercial real estate investment is a property that’s made for income-generating or business purposes. This may include office, industrial, multi-use spaces, and hotels. Unlike residential property, commercial real estate is leased to corporations and businesses. These types of properties are often subject to more complex zoning regulations.
Pros of Investing in Commercial Real Estate
Although residential properties are commonly considered the best choice for investors, commercial real estate can offer them a variety of opportunities and advantages.
- Potential for High Returns
Compared to residential real estate, commercial property offers a higher annual return on investment. It’s typically between 6% and 12%, and it’s also slightly under the S&P 500’s average of 9.8%. A report by the NCREIF noted that the average return on commercial real estate had been 9.4% over the past 25 years.
- Tax Benefits
In addition to being able to provide investors with a higher return on their investment, commercial real estate can also offer them various tax benefits. Some of these include the ability to deduct mortgage interest, non-recurring expenses and depreciation.
If you’re planning on selling commercial real estate, then a 1031 exchange may be beneficial. This type of strategy allows investors to avoid capital gains tax by reinvesting the profits into another property.
- Quality Tenants
For residential property owners, finding high-quality tenants is a significant part of their investment process. Usually, they spend a lot of time and effort looking for individuals who can provide them with the best possible care.
One of the most important factors that commercial real estate investors consider when it comes to finding quality tenants is the relationship between the tenant and the property owner. This type of relationship allows businesses to maintain their professional image and take the necessary care of their property.
- Revenue Increases Valuation
Unlike residential real estate, the value of a commercial property is determined by its ability to generate revenue. This type of property can also be more profitable compared to residential properties. Having a higher cash flow can help boost the profitability of a commercial property.