It’s true what they say: a large portion of America’s most successful entrepreneurs invest in commercial real estate. No other investment vehicle, at least in my opinion, has become more synonymous with promising returns and risk mitigation.
It’s worth noting, however, that the benefits of investing in commercial real estate extend far beyond what we have all come to know. There are several advantages to investing in commercial real estate, many of which the general public are unaware of. And, as it turns out, many of those advantages are just as important as the cash flow many get into the industry for in the first place.
Real estate has become synonymous with today’s most successful individuals, and for good reason: a great deal of America’s millionaires attribute their wealth to it. In my opinion, it’s the best investment vehicle out there, but don’t take my word for it. Let’s take a look at why many of today’s most successful people invest in commercial real estate:
1. Control In Determining Investment Results
It’s safe to assume today’s most successful individuals didn’t get to where they are by following societal norms or conforming to public opinion; if that was the case, there would be a lot more millionaires walking around. Instead, the most successful people among us took the road less traveled and controlled their own destinies. And therein lies the number one reason a large contingent of today’s most successful people have chosen to invest in commercial real estate: control. At the very least, investing in commercial real estate awards savvy entrepreneurs the ability to play a large role in determining their investment results. More so than stocks, bonds and annuities, commercial real estate allows investors to directly impact their results.
It’s worth noting, however, that control of one’s investment vehicles isn’t without a significant caveat: responsibility. Those that choose to invest in a commercial real estate property are directly responsible for the outcome. Nobody is going to hold your hand, nor should you expect them to. However, in the event you are prepared for what is to come, control can very heavily tip the scales in your favor. With the right real estate education, sound judgment and an acute attention to detail, control in determining your investment results may very will be your greatest asset. Today’s most successful people know it, and it’s about time you did, too: maintaining control of one’s investments is a significant benefit.
2. Debt Leverage
Whether you realize it or not, all debt is not created equal. On the one hand, unnecessarily “debting” yourself to expensive cars or the latest home theater system can be quite fun, but material possessions that offer no form of return are just that: possessions. On the other hand, however, going into debt with the intention of making money could play to your advantage — quite significantly, might I add. It’s the power of debt that awards today’s most successful individuals the ability to continue making money, and commercial real estate is no exception. If for nothing else, debt has become synonymous with amortization. And for what it’s worth, most wealth is built on the amortization of paying back debt, like building equity in a commercial real estate property, for example.
Most people wouldn’t be able to invest in a commercial real estate property if it wasn’t for private money lenders or other loan originators; it’s simply too expensive. That said, you could argue that it’s necessary to go into debt to make money on large purchases. In fact, it’s the debt that promotes the ability to make money, but I digress. It’s not the idea of going into debt that successful people are encouraged by, but rather the amortization of it.
In amortizing the debt you incur, you are agreeing to pay off said debt with a fixed repayment schedule in regular installments over a period of time, not unlike a mortgage.
It’s worth noting, however, that if you are well aware of your debt repayment schedule, you will know exactly how much money you will need to collect in rent to pay down the previously agreed upon obligation. And therein lies the secret to leveraging debt in order to purchase a commercial real estate property: If you know how much debt you will be liable to pay off every month, you will know exactly how much to rent your property out for.
Provided you did your homework before committing to purchase the property, you should already know how much rent to expect on a regular bases. What’s more, your spreads should cover the debt you incurred while simultaneously allowing you to pocket some profits for yourself, all while having your tenants pay down your debt.
You see, while you may have been the one to take on the debt initially, it’s really your tenants that are paying down the loan, and perhaps even contributing to your savings coffers in the meantime. With each payment (made by your tenants, of course), you are benefiting from an increase in equity. Eventually, you will own the property after others paid it off.
3. Tax Benefits
If debt leverage and maintaining control over investments wasn’t enough to help you understand why today’s most successful people put their money in commercial real estate, there is one more benefit to consider: taxes. Namely, the benefits that coincide with them. In fact, real estate tax benefits are so significant that it’s not the least bit hyperbolic to suggest that there is a large contingent of people that invest in real estate to take advantage of them.
At the very least, a commercial real estate property is a tax shelter for your money. At its pinnacle, the right property can offer you unparalleled tax benefits.
For starters, it is entirely possible to deduct any interest you pay on a mortgage. According to Investopedia, “Homeowners can deduct the portion of their mortgages attributable to interest payments on their tax returns. These payments are higher during the early years of the mortgage and gradually decrease as the mortgage is paid off.”
While less popularized, but no less beneficial to commercial property owners, there is one tax deduction in a class of its own: depreciation. For what it’s worth, depreciation can turn a good investment into a great one. According to Investopedia, depreciation allows investors to “recover the cost of income-producing rental property.” Through depreciation, rental property owners can write off a portion of the home’s cost for up to 27.5 years.
Now It’s Your Turn
A large contingent of today’s most successful entrepreneurs invest in commercial real estate for many reasons, but the three I hit on above are perhaps the most important. The tax benefits, control and debt leveraging that has become synonymous with the commercial investment platform are second to none, and there is no reason you can’t get in on the action. If you have been on the fence about making the jump to commercial real estate, take a look at what I had to say above, and perhaps you will find yourself with a little more direction.