Prior to the evolution of the internet, only private institutions, affluent investors, and hedge funds participated in the commercial real estate (CRE) markets.
Today, the average investors are working-class people investing their money to secure future wealth or for supplemental income and retirement.
A “CRE” investment is an acquisition arrangement to purchase and/or renovate commercial properties. Many times the investor starts small and will need a loan to buy a property for rental purposes.
We will discuss the kinds of commercial real estate investments, loan types, and three major benefits of investing in CRE and CMBS trading securities further in this article.
Types of Commercial Real Estate Investments
- Office Building
- Retail Storefronts
- Multi-Family Residential
- Industrial Facilities
- Commercial Mortgage-Back Security (CMBS)
People invest in CRE properties and commercial mortgage-back securities to receive continuous capital gains on their invested capital.
If you need a loan to help secure a property, there are CRE loans available through SBA (Small Business Administration) and financial institutions, such as banks. The requirements are strict for smaller businesses because of their high risks.
One significant requirement is that the owner must occupy the property for business use 51 percent to 100 percent of the time. When a lender sells a mortgage to other financial institutions, the commercial real estate borrower has to pay interest on the trading security.
The lender can combine the CRE mortgage with other types of mortgages into a Commercial Mortgage-Back Security (CMBS), a security instrument.
Three Rewarding Benefits of CRE Investments:
Commercial real estate investments attract global investors seeking long-term profitability. Some investors receive tremendous capital gains and can set rental prices based on their financial goals and needs. Real estate investments can save money by lowering taxes and increasing profitability because of their low risks. Let’s explore the three best benefits of CRE investments listed below.
1. Real Estate Tax Deductions
Commercial real estate investors can reduce their tax liabilities by taking advantage of deductions on their federal income tax returns. Some examples of deductible items include the following:
- Interest Expense
- Rental Losses
- Capital Gains Deferment
- Tax Credits on Low-income Properties
- Qualified Business Income
Beginners will need a professional tax preparer to help them prepare their business income tax return and ensure they are reporting accurately. If you have beneficiaries, they can reduce their tax obligations and save thousands of dollars.
2. The Profitability of Real Estate Investing
Investors intentionally invest in commercial real estate properties for capital gain. Monthly rental income from renters helps them to earn considerable profits and returns on their investments. You can charge your renters a set price and raise future prices with a notice. Amenities are a helpful way to add value and increase your profits and rent.
3. Real Estate Carries Lower Risks
All investments have risks, including procurement of commercial properties, stocks, bonds, mortgage-back securities, and mutual funds. In the real estate industry, you have more control of your assets and can set the terms of your lease agreements. The contracts allow you to set monthly rental payments on six-month up to five-year term leases. Remember, various events, such as the Covid-19 pandemic, can cause risks to increase in the real estate market.
Commercial real estate properties, such as multi-family residential and retail, have the possibility of building a diverse investment portfolio to build wealth. If you need a loan, the SBA has lower interest rates compared to some financial institutions. CRE and CMBS investments had their difficulties during the Covid-19 pandemic, especially for small businesses.
Now that businesses are open, the industry is improving and relief from the federal government is helping them stay afloat to move forward.
Alex Capozzolo is a partner of Henry Buys Homes, a real estate company in Jacksonville, FL. He has been writing for the real estate industry for several years. Henry is a licensed agent that operates in the Florida market.