Commercial Properties - Are They Worth the Investment?

Most commercial properties have multiple tenants, meaning the property’s revenue only partially relies on one tenant. This helps diversify the portfolio, which can reduce the risk.

Additionally, most commercial properties are purchased with cash and debt (also known as “leveraging”), which can significantly increase potential returns on investment.

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Cash Flow

One of the main reasons to invest in commercial property is that it offers consistent cash flow. This income comes from rental revenues and covers expenses like taxes, insurance, maintenance, and depreciation. The remainder is distributed to investors based on their ownership percentage.

Additionally, most commercial properties have multiple tenants, which creates some diversification for the owner and reduces the risk that the building will rely on one particular business’s revenue. This helps to stabilize the property’s value and increase its overall profitability.

Like Denver Commercial Properties, they offer cost-effective betterment opportunities to enhance the property’s value further. Ultimately, commercial real estate can provide substantial financial benefits that make it worth the investment for those looking to expand or start a new business.

Taxes

There are many different commercial real estate properties, each with its operational quirks and investment nuances. However, they all generate income and offer the potential to appreciate.

The income from a commercial property can be used to cover operating expenses, depreciation, mortgage interest, and more. This may lower investors’ tax bills, though they will likely still be subject to depreciation recapture and capital gains taxes when they sell.

Moreover, investing in commercial property usually involves a combination of cash and debt or “leverage.” This practice can help increase returns by using borrowed funds to purchase more equity. It can also shield a portion of the income stream from taxation and boost investment potential. However, leveraging is not without risk and should only be done with a trusted advisor or professional.

Diversification

Commercial properties are a great way to diversify an investment portfolio. They also offer a consistent return, attractive ROI, and tax advantages. Furthermore, they are an excellent hedge against inflation as rents increase with inflation while property values remain stable.

Furthermore, investors can leverage these investments using debt rather than all their equity to purchase a property. This is known as “leverage” and can significantly increase total potential returns.

Additionally, commercial leases are longer than residential property leases, providing the investor with a more steady income stream. Geographic diversification is another risk mitigation method, allowing investors to invest in different cities or regions and mitigate the effects of local economic cycles and property bubbles. Specializing in a particular commercial real estate type is also an effective diversification strategy, as investors can become more familiar with the market and become experts within their niche.

Equity Appreciation

A primary reason to invest in commercial property is its income potential. Commercial properties can offer a return on investment between 6% and 12%, depending on location, economic conditions, and external factors (like the pandemic). This is a significantly higher range than single-family home rentals, which usually yield an annual return of 4% at best.

Another benefit of commercial real estate is its equity appreciation. This is because investors can leverage their investments by purchasing a property with a mix of cash and debt. The combination of money and debt increases the total purchase price but can also significantly increase the potential returns.

In addition, many investors can take advantage of tax benefits for investing in commercial properties. Owners of commercial properties can deduct their rental income, repair costs, mortgage interest, and depreciation from their taxes.

Taxes

Commercial properties produce regular income for their owners, and those profits are first used to cover expenses like property taxes, maintenance, depreciation, debt service, and so on. Any excess income, known as “capital gains,” is taxed at the time of sale depending on an investor’s filing status and tax bracket.

Many small businesses choose to invest in real estate in a limited liability company (LLC) structure so they can enjoy the benefits of depreciation recapture and mortgage interest deductibility, which can reduce their overall tax bill. Over time, these tax deductions can add up to a sizable amount of savings. Moreover, commercial property prices appreciate over time, significantly boosting investment returns. A key to property appreciation is increasing net operating income (NOI) — the income from rents minus operating expenses.