Commercial real estate investing is not the path to easy riches, but it does provide a path to wealth creation that is surprisingly available to middle and upper income Americans. This path is both available and largely unused. Successful investing in commercial real estate is hard work, but it rewards those who are willing to do the work. Many elderly have had a comfortable retirement because of successful real estate investments, many students have gone to college funded by successful investments, and many boats and vacation homes have been financed by it. Such accomplishments cannot be taken for granted. Successful investors must have the skill, knowledge, and energy to find appropriate properties, evaluate them as investments, arrange for financing, and either manage these properties, evaluate them as investments, arrange for financing, and either manage these properties or find a buyer for them.
It does not matter if the property under consideration is a single-family home, a duplex, a condo, an office building or an ice rink. Purchasing such a property to make a profit makes it a commercial activity.
Successful real estate investors optimize their leverage. The general rule is "borrow to buy, sell for cash."Most leverage can make a good investment a great investment. Wise real estate investors generally look for those properties that provide the most financing. That is why single family residences make such attractive investments.
Real estate ownership is encouraged by the tax system. Two important advantages come into play here. The first is interest costs. The second has to do with the concept of depreciation. Both of these factors combine to make real estate investing very attractive.
Interest costs can be fully tax deductible for your personal residence or for any commercial real estate. This means the cost of funds is reduced by your marginal tax rate. Second important tax advantage to owning real estate is the ability to depreciate any property being rented. Depreciation is a legitimate deduction used to offset revenue that would otherwise be subject to taxes. This means you can show a loss on your real estate investment, use that loss to reduce your personal income, and thus lower your taxes. Anything to do with taxes tends to be a bit tricky, and depreciation is no exception.
Investing in real estate is like owning your own business. Many individuals want to gain more control over their lives. The regimen of working for someone else, taking orders, and being subject to an array of arbitrary rules may feel stultifying. It is not uncommon for such individuals to want to start their own business to fain more control over their lives. For many people, this may not be a practical alternative. However, there may be another path to financial independence. Investment in real estate is something you control entirely. You find the opportunities, arrange the financing, bring all the elements together, and create something where there was nothing before. An individual can enter this business starting small and staying small, with the real estate investing being a profitable hobby. As an alternative, an investor can start small and over time, with a few good moves, grow his or her business into a high paying full-time job.
Investors in commercial real estate are debtors. They borrow money now to pay it back later. In an inflationary environment this confers a tremendous advantage to the buyer. Interest rates adjust for the level of inflation by adding an inflation premium to the real rate of interest.
A first time investor should not go for an industrial or office building property unless very special circumstances are present. Success in this area comes best to the novice who starts small and simple and acquires the necessary experience for success over time.
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