Are you interested in investing in commercial real estate in Calgary? Curious about the benefits and advantages this type of venture can yield?
Investing in a commercial property is a good idea as it can provide great investment returns. These properties are bought by people who have surplus capital and have the intention of renting out space to businesses. The main reason this kind of property is popular among investors is that it offers both monthly cash flows from tenants and appreciation of the real estate over time.
While there are many good reasons why you should invest in a commercial property, these are some of the most compelling ones:
Many people find it hard to make money through other investments like mutual funds and stocks. With commercial real estate there are typically three ways an investor can see a return on their investment, often it is a combination of two or three of them.
The first way an investor would earn a return is likely the simplest, and that is through the monthly cash flows that are generated from renting the real estate to businesses. Businesses require real estate to operate, whether that be retail, office, or warehousing.
The second way an investor could increase their return on their investment aside from the monthly cash flows is adding value to the real estate that they are purchasing. This is often done when an investor purchases a building that is under-rented or has more than the typical vacancy. This could be caused by a variety of reasons, but it is often due to maintenance or repairs that have been put off by the current owner. An investor can often purchase these properties for less than a fully rented building. They can then complete any required renovations or maintenance to the property and either reduce the vacancy in the property or even increase the rental rates for the property, both of which will have a positive effect on the value of the property.
Finally, the third common way for an investor to earn a return on their investment is through appreciation of the asset. Typically commercial real estate or income producing real estate follows the trend of inflation. In the previous ten year period in Canada, inflation has hovered around 2% (Source – Trading Economics ). Putting aside the current global inflation issues, we can use the 2% average for the previous ten years as an example. If a purchaser was to buy a property for $1,000,000 in 2011 and hold it for a 10 year period until 2021, the 2% inflation on that property would give it a current value of $1,218,994.42. When financing properties rather than paying cash for the entire purchase price, the return on this appreciation is considerably more as the Purchaser is only contributing a percentage of the actual initial cost of the property.
Another reason commercial real estate is a popular investment is that unlike residential real estate where the owner of the property is still responsible for the property taxes, condo fees, general repairs and maintenance, etc. in commercial real estate, theses costs are passed onto the Tenant as additional rent or operating costs.
Commercial rents are typically “net” to the Landlord/Owner, this means that the Base Rental rate is net of any other costs or expenses. Due to this, advertised rental rates for commercial properties are often described in two separate rates, the asking rental rate, and the operating costs, both of which are paid by the tenant on a monthly basis. The rental rate is what goes directly to the owner, the additional rent is used to cover the costs passed onto the Tenant.
If the thought of having to actively manage your properties or be a hands on Landlord seems daunting or a downside to being a real estate investor then hiring a good property manager can be an easy solution. For the best results and easiest transition, it is best to hire a property manager who specializes in the type of property that you are purchasing (multi-family, office, retail, or industrial). Your property manager will do everything from collecting the monthly rent to arranging for repairs. A property manager will typically charge anywhere from 3-5% of the net rent, but again, this is an expense that can be passed along to the Tenant, as long as it is disclosed within the Lease Agreement.
One of the most attractive parts of investing in real estate vs the stock market or mutual funds is that real estate is a tangible asset with an established value given to it. As mentioned above, the most common type of return is the cashflow that is generated from the tenant’s occupying the real estate. For most real estate investments, the value is established based on the rent that is generated. In a worst case scenario, the building would not generate any revenue, but the investor would still own the asset and could sell to liquidate their original investment if required. In the stock market, if the stock drops to zero, your investment is gone with no asset remaining to sell.
The idea of diversifying here means getting investments from different sources, which, if managed correctly, will give you a more stable and predictable return regardless of what happens to the economy. Real Estate investors typically like to stay within an asset class that they are familiar with (multi-family, office, retail, or industrial) because of this, the best way to diversify is to explore different markets or “sub-markets”. This doesn’t necessarily mean you have to invest in a market where you do not live or are unfamiliar with, but more so different areas of the City. Some parts of the City may be going through revitalization with lots of activity, some areas might be more established and not have near the activity going on, others will be somewhere in between. Investing in different sub-markets within your desired location is a great way to diversify your real estate portfolio.
All these reasons show that investing in commercial property is one of the best things you can do to secure long-term investment success. Therefore, if you plan on saving for retirement or simply want good investments, think about adding commercial real estate as part of your portfolio.
If you found this article of value and would like more information, don’t hesitate to get in touch with our team of experts today!
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