Why Should I Invest in Commercial Real Estate?

Here’s Why Commercial Real Estate May Fit Your Investment Thesis

For investors who want to diversify their portfolios and secure long-term financial stability, commercial real estate investing may be a good option.

Normally, when people think about real estate investments, residential properties are the first thing that comes to mind. However, there are also plenty of good reasons to go for commercial real estate. Here we will discuss some of the benefits and opportunities that investors shouldn’t overlook when it comes to commercial real estate properties.

What is Commercial Real Estate Investing?

Before we dive into its benefits, let’s take a brief look at what commercial real estate investing is. Commercial real estate investing involves purchasing, owning, leasing, or selling properties that are primarily intended for business purposes rather than personal residency. [1]

These properties can range from office buildings and retail spaces to industrial warehouses. Unlike residential real estate, which typically involves individuals or families seeking housing, commercial real estate deals with businesses as tenants or buyers. [1]

Investing in commercial real estate offers several potential benefits. For example, commercial properties often have longer lease terms compared to residential properties, providing greater stability for investors.

Commercial real estate can also appreciate in value over time, potentially yielding substantial capital gains upon sale. However, no investment is without risk and that also applies to commercial real estate investing. Tenant occupancy rates and property values can be affected by economic downturns, for instance. It also demands substantial initial capital, which can be a barrier for many investors.

With that out of the way, here are several compelling reasons why you should consider investing in commercial real estate:

Steady Income Streams

One of the most enticing aspects of commercial real estate is the potential for generating steady income streams. Unlike residential properties, which typically yield monthly rent from individual tenants, commercial properties often attract long-term leases from businesses.

Most investors know that it is better to hold an asset over time than to jump in and out chasing gains. This is what makes commercial real estate a solid choice. Income is typically distributed on an annual, quarterly, or even monthly basis. [2]

With commercial real estate investing, tenants sign leases with fixed terms, providing a predictable cash flow over an extended period. These leases often come with longer terms and are typically structured to include periodic rent increases, helping to counteract inflation and ensuring the income stream grows over time.

This stability in income makes commercial real estate an attractive option for investors seeking reliable returns, whether they’re looking to supplement their current income or build long-term wealth through passive investments.

Adding commercial real estate to your investment portfolio may give it some added stability. [2]

Diversification

Investing in commercial real estate allows you to diversify your investment portfolio, spreading your risk across different asset classes. By adding commercial properties to your portfolio alongside stocks, bonds, and residential real estate, you can reduce the overall risk of your investment holdings.

This is because commercial properties are less correlated with traditional financial markets, providing a hedge against market volatility. Its value and income potential are less likely to be directly affected by the ups and downs of the stock market.

If one investment class performs poorly, savvy investors can still reap gains from others. Diversification protects them against losses. [2]

Another reason for this stability is the longer lease terms typical in commercial real estate, which can range from several years to decades, providing a consistent cash flow. So not only does diversification help spread risk, it also potentially enhances long-term returns.

Potential for Higher Returns

Commercial real estate investing offers the potential for higher returns compared to many other investment types, such as residential real estate or stock market investments. Again, this has something to do with the fact that commercial leases tend to be longer, often ranging from 5 to 10 years. For that duration, investors can potentially enjoy a stable and predictable income stream. [2]

There is also the fact that commercial properties can house multiple tenants, diversifying the risk of vacancy and ensuring more consistent cash flow. The higher initial rental rates for commercial spaces compared to residential units also contribute to elevated income levels.

Additionally, due to factors like improvements in infrastructure, urban development, and economic growth in the surrounding area, commercial properties often appreciate in value at a faster rate. This appreciation, combined with the ability to pass operating expenses onto tenants through triple net leases, enhances their overall return on investment (ROI). [2]

For investors seeking substantial and sustained financial growth, commercial real estate is something to look into.

Hedge Against Inflation

Commercial real estate investments have historically served as a hedge against inflation. As the cost of goods and services rises over time, so do rents and property values. Commercial leases often include provisions for rent escalation linked to inflation or changes in the consumer price index (CPI), ensuring that your rental income keeps pace with or even exceeds the rate of inflation. [2]

This intrinsic ability to generate inflation-resistant income makes commercial real estate a strategic choice for investors seeking to protect their wealth from the erosive effects of inflation.

Tax Advantages

When you invest in stocks and bonds, you have to put aside a portion of your earnings to pay capital gains taxes. These taxes are hard to avoid unless the investment is part of a qualified plan or retirement account. [2]

However, commercial real estate offers a number of ways to reduce or eliminate capital gains.

Investing in commercial real estate offers numerous tax advantages that can help boost the profitability of your investment. Expenses related to owning and operating commercial properties, such as property taxes, maintenance costs, and mortgage interest, are typically tax-deductible.

With commercial real estate, investors are able to depreciate the value of the property over time. This non-cash deduction allows investors to write off the cost of the property and improvements, thereby reducing taxable income and potentially lowering their tax liability.

Investors can even take advantage of the 1031 exchange, which permits the deferral of capital gains taxes when selling one property and reinvesting the proceeds into another similar property. [2]

By leveraging these tax benefits, investors can improve their cash flow and ROI.

Professional Management Opportunities

Lastly, commercial real estate investments provide opportunities for professional management, allowing investors to leverage the expertise of property management professionals who specialize in handling the day-to-day operations of commercial properties.

Hiring a reputable property management company can help streamline operations, minimize vacancies, and maximize rental income.

These professional managers bring in-depth knowledge of market trends, tenant relations, lease negotiations, maintenance, and regulatory compliance. This not only ensures that the property is well-maintained and tenants are satisfied, but it also maximizes the property’s income potential.

With the right management team in place, investing in commercial real estate can become a passive income stream, freeing up your time for other pursuits.

Letting a third-party property management company handle all of these tasks allows you to focus on strategic growth rather than operational hassles. This way, you are able to concentrate on more important tasks.

In the long run, the involvement of experienced managers can significantly reduce the risks associated with property management, providing a more stable and passive income stream for investors.

The Best Real Estate Investment for Accredited Investors: Multifamily Syndication

Investing in commercial real estate offers a myriad of benefits that make it a compelling addition to any investment portfolio. However, if you are an accredited investor, there is an even better option to consider.

Multifamily syndication is a great addition to your investment portfolio because it solves some of the biggest issues that are associated with real estate investing. Real estate syndication is an investment strategy that involves multiple investors pooling their financial resources together to purchase a single real estate property.

When this is done with a multifamily property such as an apartment community or a condominium, it is called multifamily syndication. This is the most popular type of syndication deal among investors because these larger properties are generally more expensive and difficult to acquire for a lone investor. However, with multiple investors providing their share of the capital, these larger deals become more accessible. [3]

Multifamily properties are associated with a generally strong and predictable cash flow, much like commercial real estate properties. However, just like commercial real estate, they typically require a significant upfront investment. Multifamily syndication solves that problem.

With real estate syndication, investors can own a multifamily property without having to spend millions of dollars and take on all that risk alone.

A syndicator, also known as a sponsor, arranges the syndication deal. They are the ones who create and execute the business plan from start to finish, serving as the general partner (GP) in the syndication. They are in charge of everything, from locating the investment property to conducting due diligence to finding accredited investors who will participate in the deal. [3]

Once the deal is in place, it is also the syndicator who handles property management. This means investors do not have to worry about becoming a landlord. Either the syndicator will take care of the property’s day-to-day operations themselves or they will hire a property management company to do it for them. Investors do not have to deal with the headaches of property management either way.

So what do investors do in this arrangement? Accredited investors become limited partners (LPs) in the syndication deal. They only have to provide a percentage of the capital needed to acquire the property. They also have to pay certain fees to help get the syndication deal going. They have no further liabilities beyond that. [3]

This is why multifamily syndication is considered a true passive investment in real estate. In exchange for their investment, real estate investors earn a share of the property’s cash flow. This may be distributed on a monthly or quarterly basis. Depending on the deal structure, they may also get a share of the equity upon resale. However, every deal is different.

Just like with other forms of investment, investors must perform their due diligence before joining a syndication deal. You need to carefully analyze the business plan, the profit split, and all the other details of the syndication before participating. These details should be available through the private placement memorandum (PPM) or syndication agreement. [3]

With multifamily syndication, accredited investors can just sit back, relax, and enjoy their investment.

Work With BAM Capital for the Best Multifamily Real Estate Syndication Deals

Another important consideration when investing in a multifamily syndication is the syndicator you work with. Since this is a passive investment, investors will have to rely on the syndicator to run the investment property and make all the important decisions.

To maximize your chances of success, it is highly recommended that you work with a trustworthy syndicator. BAM Capital is an Indianapolis-based syndicator that is widely considered a leader in its industry.

BAM Capital has a track record for excellence and an award-winning investment strategy that mitigates investor risk while creating forced appreciation. In fact, BAM Capital now has over $700 million AUM and 5,000+ units. [6]

This syndicator prioritizes properties that are Class A, A-, and B++, focusing on multifamily real estate properties that have in-place cash flow and proven upside potential. [6]

Being a vertically integrated company, BAM Capital can handle every step of the syndication process, from acquiring the properties to renovating and managing them. Accredited investors can rely on them for guidance at every step of the syndication process.

No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.

For accredited investors who want to enjoy passive income and all the other benefits of being in multifamily syndication, schedule a call with BAM Capital and invest today.

Choose BAM Capital

BAM Capital is an Indianapolis-based syndicator with a track record for excellence and a reputation for being an industry leader. It is known for its award-winning investment strategy that creates forced appreciation while mitigating investor risk.

BAM Capital prioritizes high-quality multifamily real estate properties that have in-place cash flow and proven upside potential, particularly those that are Class A, A-, and B++. In fact, BAM Capital now has over $700 million AUM and 5,000+ units. [4]

Being a vertically integrated company allows BAM Capital to handle every step of the syndication process, from acquiring the properties to renovating and managing them. They can guide you every step of the way.

No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.

For accredited investors who want to enjoy passive income and all the other benefits of being in multifamily syndication, schedule a call with BAM Capital and invest today.

Sources:

[1]: https://www.investopedia.com/terms/c/commercialrealestate.asp

[2]: https://www.forbes.com/sites/forbesrealestatecouncil/2020/02/24/why-commercial-real-estate-is-an-important-investment-class/

[3]: https://multifamilyrefinance.com/apartment-investing-blog/multifamily-syndication#important

[4]: https://capital.thebamcompanies.com/