Many of the reasons to invest in any kind of real estate also apply to commercial real estate. It is one of the few asset classes to offer both cash flow and the potential for appreciation and as such, is one of the most common ways to create long-term wealth.

Leverage

Just as in residential real estate, investors in commercial real estate often borrow a large percentage of the funds necessary to purchase a property. In doing so, they capture all of the appreciation at a much lower initial cost. For example, if an investor makes a standard 25% down payment and a property appreciates at a relatively low 2.5% rate, that is effectively a 10% rate of return (2.5% divided by 25%). This is because the investor gains all of the appreciation even though they only put down 25% of the purchase price.

Longer Lease Terms

When compared with residential real estate, commercial real estate tends to be a more stable investment particularly in the sectors with longer lease terms. Most commercial leases have built-in rent increases, so there are predictable income streams that grow over time. There is generally less turnover and thus, less of a vacancy risk, though vacancies do tend to take longer to fill, especially if the property has been built out in a special way. A restaurant space needs another restaurant to take it over, whereas a generic office building can find another tenant more easily.

NNN Leases

On average, commercial properties need less maintenance than residential properties. A common type of lease is a triple-net lease (NNN lease), where the tenants are responsible for paying the property taxes, insurance and all maintenance. Even without a NNN lease, landlords often do not even pay for all those expenses. Commercial tenants are usually much more responsible for the space as they have longer leases and they need to ensure the space remains open for business and in good condition. If you are looking to invest in a commercial property yourself, it also tends to be less work as a landlord. NNN leases take most of the work away once a tenant is in place, and unlike residential real estate, which can be a 24/7 endeavor, commercial tenants generally operate only during normal business hours. There is also generally less competition for commercial properties compared to residential properties - far fewer people are looking to buy warehouses compared to single family houses.

Tax Benefits

Depending on an investor’s individual situation, there are also tax benefits that come along with real estate investing. Property owners can see benefits from depreciation, business expenses and mortgage interest deductions. While yearly distributions are taxed as ordinary income, appreciation is taxed as a long-term capital gain when a building is sold as long as the building is held for over a year.

Conclusion

For investors looking for a steady income stream with a relatively low downside risk, commercial real estate could be a good fit. With many crowdfunding platforms lowering the barrier to entry and offering greater chances at diversification, it is easier than ever for everyday investors to access this asset class.