Great wealth has been grown and preserved by investing in commercial real estate assets, and one of those reasons is for what I like to call “the fuse burning at both ends” concept.
Lenders love commercial real estate. It is a highly financeable, secured asset that does not move. That’s why the bankers love it.
When you leverage a cash flow producing piece of real estate, you are buying an asset that is financed by the cash flows your tenants pay you in the form of rent. This is important because not only do you have the potential to receive a return on your equity, but you have third party customers that are retiring debt you used to financed the acquisition of the property. Again, if done properly, these tenants are not only making your interest payments, due to amortizing loans, they are actually “paying down” your note and building equity for you automatically.
Additionally, If you used long term fixed rate financing you have essentially locked in your debt service for a period of time. It’s fixed, it won’t change. This is very important.
If you bought “right” or with some value add component, over time, you should not only be able to increase your NOI, but also the total value of the asset. Here’s where the “fuse” concept kicks in.
So your debt is decreasing and being retired on one side of the fuse, and due to long term appreciation and NOI growth, the value of your asset is increasing on the other side of the fuse.
Your cash flow is also increasing because your debt service is static. This is how you build tremendous long term wealth in cash flow producing commercial real estate.