In Uncertain Times, Commercial Real Estate Is Solid
Maintaining a healthy investment portfolio requires ample research as well as the ability to make quick decisions. If an investment is beginning to perform poorly, it may be time for you to sell it off before it crashes entirely. During uncertain times, being careful about how you manage your portfolio becomes crucial.
While stocks are more difficult to predict than before, commercial real estate remains a solid investment opportunity. Even during instances of economic uncertainty, this sector has the potential to provide you with consistent returns and property appreciation. Here are a few reasons why commercial real estate is a strong investment.
You’ll Gain Access to Tax Advantages
Commercial real estate investments allow you to obtain tax benefits that aren’t available to everyone, which involves deductions pertaining to depreciation. The cash flow you bring in will likely be less than the interest expense and depreciation.
In many cases, these benefits can be recaptured when you sell the property. Depreciation recapture has a 25% tax rate. Any capital gains you earn are taxed with the capital gains tax rate, which is anywhere from 0-20% depending on your annual income.
Let’s say that you buy an office building for $1 million. If $250,000 of this money was used to purchase the land, the basis of depreciation is $750,000. If you own a property for around five years, you can depreciate around $135,000 from the property, which would lower the basis of depreciation to $615,000.
If you eventually sell this property for $1.5 million, you would gain $885,000 because of the $750,000 gain plus the $135,000 in total depreciation. While $135,000 of these profits will be taxed at 25%, the remaining $750,000 is taxed with the long-term capital gains rate.
Hedge Against Inflation
If you’re wondering how inflation will impact your investment portfolio, most types of commercial real estate are effective when used as a hedge against inflation. Along with the increase in property value, you should benefit from any rent increases that occur during inflationary periods.
If you have any growth stocks in your portfolio, investors usually avoid these opportunities during inflation, meaning that a portfolio that’s solely invested in stocks will likely perform worse than a portfolio that diversifies with a mixture of stocks, commercial real estate, and other investments.
Another advantage of investing in commercial real estate is your ability to put debt into the property, which improves the total purchasing power of every dollar of equity. In this situation, the property’s potential returns also increase.
If you’re buying a $1 million property with $250,000 as a down payment, the remaining $750,000 will be provided to you by a lender. If you sell this property for $1.25 million in a year, your cash return will amount to 100%. When the property is bought without any debt, your cash return will only be 25%.
Use Technology to Your Advantage
During uncertain economic times, the research you perform on commercial real estate will be the difference between a sound investment and one that hurts your portfolio’s value. There are tools that can assist you in keeping data organized, which allows you to better compare commercial properties and make informed decisions.
If you want to increase your chances of a successful deal, mobility is important. For instance, is all of your lease or rental information accurate and up-to-date? Software can automate these tasks for you, which reduces the possibility that you make a mistake.
If you’re walking through a property that you’re about to invest in, there are mobile apps that allow you to make note of any issues that need to be addressed before or after you make the investment. While commercial real estate is currently providing investors with fantastic opportunities, you’ll need to do your due diligence before finalizing any investment.
Commercial real estate is a good option for investors who want to add relatively stable investments to their portfolios. These properties are tangible assets that deliver steady cash flows and add diversification to any portfolio. You’ll receive advantageous tax treatment as well as the benefit of a buffer against inflation. Despite the uncertainty of the economy, any investments you make in commercial properties should help you bolster the strength of your entire portfolio.