We, all work hard for our money but as the old cliché goes “Is your money working hard for you?” An investment is an asset or item acquired with the objective of generating revenue or appreciation or both. Whichever avenue you decide to invest your money, there’s one thing that should be at the forefront of your decision-making and that’s risk. There’s always a purpose behind financial investments. What’s yours? Whatever your reason, sustainable and continuous investment in real estate may hold the answer.
Buying and owning real estate is an investment strategy that can be both satisfying and lucrative. Unlike stock and bond investors, prospective real estate owners can use leverage to buy a property by paying a portion of the total cost up front and then paying off the balance, plus interest, over time. Over the last two centuries, about 90% of the world’s millionaires have made their money by investing in real estate.
What Is Commercial Real Estate and why invest in it?
Commercial real estate (CRE), is a property used exclusively for business purposes. Most often, commercial real estate is leased to tenants. This category of real estate ranges from office space to retail space, the recent major entrant in this category is warehousing.
For an investor, a right strategy with an experienced guide can be highly beneficial. The guide can help them by taking care of three major points of investing.
In my order of importance:
- Safety of Investment;
- Future appreciation possibilities; and
- Returns VS Investment.
There are many reasons to explore Commercial real estate, for example, looking for a steady income after retirement or giving your children a better education, or simply want of diversification of investment portfolio. Passive income is the order of the day, everyone takes life insurance for the safety of his/her loved ones, which he/she personally normally never enjoys as most time the money is to be paid after death. An investment made in Commercial real estate Properties for rental returns is the best safety for loved ones. The benefits can be enjoyed by the investor as long as he/she is living and after his/her passing away the returns can be enjoyed by the family left behind.
Many investors get caught in the web of higher returns on investment and end up buying B grade properties. Most of such properties have low potential of appreciation, thus they end up regretting in the long run.
What points should be looked at before buying an asset for rental returns? Always keep future appreciation as your first goal whenever you buy a property. Buy premium well located properties, although expensive, ground floor properties are the best buy. If there is an existing tenant in the property, add premium for the tenant depending about his market creditability and never be greedy for the returns, which can be on the slightly lower side. The major advantage of such premium properties is even if the tenant vacates the property, there are always takers for such premium properties.
Unlike residential assets, commercial assets are witnessing stable & increasing demand and prices. Commercial real estate also has benefits of comparably longer lease contracts with tenants (normally 5 to 20 years) than residential (normally 1 to 3 years). This long lease time frame gives the Commercial real estate holder a considerable amount of cash flow stability. Rented properties can make available regular income while maximizing accessible capital through leverage (loans). Moreover, many associated expenses are tax-deductible, and any losses can offset gains in other investments. In ideal situations, properties appreciate over the course of their mortgages, leaving landlords with a more valuable asset than they started off with. The cash generated can also be used for various purposes like paying off any loans on the property, personal expenditure or for further investments.
I see many people investing in residential properties for the sake of trying to save on Capital gains taxes, they do not realize that in the long run they lose more on the appreciation potential. My advice to all real estate investors is to have only one single residential property for living purpose. Residential properties should never be treated as investments and should solely be made for the purpose of personal use and mental satisfaction and stability for the family.
Income potential: The best reason to invest in commercial over residential rentals is the earning potential. While residential properties give 2 to 3% annual returns on the other hand Commercial properties within the city limits generally have an annual return between 5% and 7%, depending on the type of property. The best rentals available in this sector are from the warehousing sector, which give returns between 8 to 11%, however the capital investments in this sector are on the higher side.
Income is created when you work; Wealth is created when your money works for you. You will only become rich when you make money while you sleep and income is generated in the form of “monthly rental”.
Warren Buffet recommends starting investing early. Start today, if you haven’t started by now!!
Pankaj Roshan
The author with 32 years’ experience, is a leading Real estate Broker/Consultant, and can be reached on pankajroshan@roshanrealestate.in
