What comes to mind when you think of real estate investing? For many, it’s rehabbing single-family homes or managing rental properties. And while these are great investments, many investors may be missing out on opportunities in commercial real estate.
Why diversify into commercial? Here are three reasons why you may consider this asset class.
Commercial real estate (CRE) has the potential to offer consistent income, often higher than traditional rental properties. The earnings potential is one of the most alluring reasons investors transition from traditional real estate investments into commercial properties. Where single-family homes see annual returns between 1% to 4% (at best), commercial properties often see annual returns off the purchase price between 6% to 12%, far outperforming smaller asset classes.
When you rent a single-family property (or even a multifamily apartment complex), repairs and maintenance of the property’s condition are always the investor’s responsibility. With a large enough rental portfolio, maintenance management can be costly and time-consuming, continually pulling investors into the daily management of their assets. While there are variations, CRE often operates under Triple net leases. With a triple net lease, the business renting the property is held responsible for remodeling, repairs, and general maintenance, while the investor is only left making the mortgage payments. Even common areas of the property can be improved through CAM charges (common area maintenance fees), making the expenses and the process of maintaining a property simpler for CRE investors.
Hedge Against Inflation
Defined as a decline in purchasing power over time, inflation has driven many investors across asset classes to consider how they can best protect (and grow) their hard-earned cash. CRE has been known to generate consistent cash flow, making it a reliable hedge against inflation. Why does commercial real estate continue to perform, even during economic instability? Commercial properties are closely tied to consumer markets, where rising consumer prices quickly correlate to rises in rents and values in CRE (lease agreements can even include annual base-rent adjustments tied to CPI). Commercial real estate is built to be quickly adaptable to consumer markets, making it historically a cushion against inflation that investors can count on.
These are only a few of the benefits CRE can offer. Despite the increases in economic uncertainty, commercial real estate provides exciting opportunities to earn more cash, spend less time and money on repairs, and hedge against inflation. These key differences may help investors take their business to the next level.
Investor Loan Source, a private money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors hard money loans is our business; it’s all we do. We offer several business real estate loan products designed to serve a variety of investors and property profiles, including private money lending for properties to sell on owner finance.