Is Commercial Real Estate the Most Lucrative Investment Option?

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There are many ways the penny-wise investor can turn pennies into fortunes in today’s commercial society. One of the most effective and time-honored ways of doing this is through the commercial real estate market. This is not a recent occurrence and this method of increasing fortunes has helped some of the most prominent investors in US history carve out their fortunes.

The most important thing to understand is that the fundamental reasons that allowed real estate investors back in the 1800’s to create a fortune still hold true today. Following is a short compendium on the Cincinnati commercial real estate market and why it is so conducive to positive returns.

1. Income

One of the most impressive and singularly attractive about the commercial real estate market is that produces income. Unlike stocks, for example that won’t necessarily payout regular dividends, the commercial real estate game does pay out regular cash distributions. This trait is especially attractive as it allows the investor to gain a measure of security for those instances in which the market is in recession. This is because there is no need to wait for the assets to be sold to collect a profit. The way most stocks work is that the items must be sold to generate cash, but commercial real estate works in a different way.

The cash generated from commercial real estate is generated by the cash flow of the locations, not the sale of property.  Furthermore, the commercial real estate market has had some of the highest ROIs seen anywhere in the investment market. The profits are considerably higher as well, whereas stocks can rake in about 3% of the investments and bonds or treasuries can gain as much as 1%, the commercial real estate market has been known to regularly collect 10% and more.

2. Capital Appreciation

While cash flow is an inspiring notion, it is the considerable wealth available from capital appreciation that really sweetens the commercial real estate deal. This means that the value of your commercial real estate property can increase over time and this increases profits as well. The capital appreciation is so great that commercial real estate has been one of the greatest safeguards to inflation in all the investments markets.

One important reason that rent rise with inflation is that the value of the commercial real estate market is based on the rates of those rents. As the price of the rents increase, so do the value of the properties, the relation is direct. Furthermore, inflation will increase the costs of developing new properties as. Then the values of older properties must increase to match the costs of newer properties.

3. Leverage

This is another key detail that allows the savvy commercial real estate investor to make such an impressive fortune. It is important to remember that very few commercial investments of this type are made with 100% cash down. Typically, a portion of the cost is paid in cash while the rest is made with a mortgage.

 

This greatly improves the capacity you have for the cash on hand and can allow you to increase this wealth very quickly. This was the trick that was used by many real estate investors who became global magnates and it works like this:

You see a commercial property that suits your investment profile and the cost is a cool $1 Million. You buy in with $200,000 in cash and an $800,000 mortgage. Time goes by….

Someday soon the appreciation increases the value of your property by 50% and you can then sell your property for $1,500,000 for a net profit of $500,000. But instead of thinking of that $500,000 as only half of your initial $1,000,000 cost, you can consider this $500,000 as a 250% increase on the %$200,000 cash you invested.

Why are banks willing to make such impressive loans for commercial real estate and not just any type of asset or investment. It could be that the commercial real estate market has such a great history of performance that they feel comfortable here. Furthermore, the underlying values of the commercial real estate market is the stable rent which essentially must maintain a fairly constant value.   Stocks and other investment types are very volatile and can prevent great fluctuations in a short amount of time.

4. Security

The values of the commercial real estate market are essential and secure. This is because the needs for housing, business locations, storage and industry are constant and based on residential, industrial and commercial needs. The underlying values for stocks on the other hand are very unpredictable, when compared to the more complex business models that can be structured around commodities and luxuries, we see that commercial real estate caters to a market that is in constant demand.  We see this in the price to earnings ratios stocks and commercial real estate trade in. Stocks typically carry very high price to earning ratios of 100 P/E or higher, while commercial real estate will typically see ratios of 10 P/E or less, representing a far lower risk than stock options.

5. Diversity

Having the proverbial eggs spread out in several different “baskets” allows you some security in your investment plan. Most commercial investors have multiple tenants from whose regular payments they profit. For example, If you own a mobile park with a capacity for 100 or more tenants and two of them were to leave your park, you will not suffer so badly. But, with a stock or bond investment plan your profits are tied up in the single investment and if it doesn’t pan out, the consequences can be critical.

Investments are in important way of improving the future with an investment in the present. This has been a symbol of wisdom, patience and prudence and has led many of our nation’s finest financial minds to their considerable fortunes. With a history of unparalleled returns on investment and a security like no other, the commercial real estate market is perhaps the most profitable.