Smart investors are looking for ways to make their money work for them, which is why private commercial real estate is often part of the investment strategy. If you are looking for new investment opportunities, then it can be helpful to learn about these benefits to identify the best place to put your money.
What is Private Commercial Real Estate Investing?
In easy-to-understand terms, private commercial real estate investing is a way to invest in CRE by obtaining DIRECT ownership in commercial real estate property, such as an office building, multifamily housing, land, shopping centers, storage facilities, and more. Like any investment, the goal is to make a profit. Often, the profit comes from the rent that comes from tenants who are occupying the property for business. Additionally, a good investment and the right property management strategy could have a positive ROI with the appreciation of the building over time.
If you are interested in investing in commercial real estate, there are a handful of options to help execute the invesment. You can purchase assets as a direct buyer. In this situation, you will need to have significant experience navigating the many facets of a CRE acquisition. Choosing to undertake this approach could be risky if you aren’t familiar with the commercial real estate industry and the factors that will impact the ROI on the property.
Another option to invest in private equity commercial real estate is to take a passive approach with an investment firm that specializes in private placement commercial real estate investments. This option presents a passive approach to investing and leverages the knowledge of industry pros to acquire, manage and disposition the asset.
Benefits of Investing in Private Commercial Real Estate
There’s no question that this form of investment can be beneficial when the money is handled correctly. As you are evaluating your options, it is important to stay informed about these benefits so that you can choose the right real estate investment opportunities to match your financial goals. Here are a few things you need to know:
High Return on Investment
ROI is everything when you are considering investment opportunities. It doesn’t make sense to put your money into a deal if you don’t expect to profit. You have the opportunity to gain high absolute returns which takes into account many factors such as depreciation/appreciation and ongoing cash flow.
These data points are calculated to determine the amount that can be earned over time, and shown as a percentage gain based on the original investment. Ask to see reports and projections so that you can determine if you are investing in the right opportunity. Keep in mind that these returns are never guaranteed; there is always a risk in real estate investing. But you can minimize the risk by looking at the possible ROI.
As mentioned above, there is a risk when you choose to put your money into any type of investment. The goal of every portfolio is to maximize the possible return and minimize volatility at the same time. When the economy shifts, is your profit going to be affected? The ups and downs in the market can be stressful if your investment is closely tied to the changes in the stocks and bonds.
With private commercial real estate investments, the values don’t fluctuate much on a daily basis. Instead, the overall value tends to have a slow appreciation over time, making it much less volatile compared to other investment opportunities. There are pros and cons to both types of investments, so you should talk to a financial investing expert regarding your personal investment strategy. For example, liquidity is more readily available in the public markets, but you gain that liquidity with the potential volatility. On the other hand, private investments aren’t as liquid, but the volatility is lower.
One element that needs to be considered as you are looking at potential ROI is how taxes will impact your profitability. It can be disappointing to feel as though you have a great profit margin on your investment only to discover that taxes ate away at those margins. While taxes are unavoidable, there are things that can be done to minimize the burden of those taxes.
After-tax yields offer one of the greatest benefits of investing in private equity commercial real estate. Income is generated through these properties, and that income can be tax-shielded due to the depreciation calculations. As a result, investors can find the right balance of long-term cash flow and profitable margins, without the burden of heavy taxes.
You’ll need to talk to a tax accountant for advice and detailed information. But a high-level overview is that the IRS makes it possible for investors to take the losses as depreciation. As the building ages, the physical elements are subject to depreciation and can be calculated over time. As a general rule of thumb, the highest tax bracket for income is 37%, but real estate investors can sometimes pay between 20% – 25% in taxes with the right tax strategy.
Your tax accountant can help you shape the right strategy based on your needs. Not only will you discuss current tax strategy, but you also need to know about the potential recapture rate if the property is sold. Capital gains is another factor that could result in taxation, depending on the situation.
Part of your tax plan might include deferment of the taxes indefinitely, using a 1031 exchange strategy. This process is often used to defer capital gains taxes. It works by rolling the investment into a new property when the first commercial real estate investment is sold.
Find the Right Investment Strategy
Do you have questions about your options for commercial real estate investing? As you are evaluating your options, rest assured knowing that our team at First National Realty Partners is here to assist. We’ve dialed in the system to help ivestors with private commercial real estate opportunities. Contact us any time to learn about the possibilities that are available to you.