The Rewards and Risks of Commercial Real Estate Investment

By: Jack Sternberg

Investment in commercial real estate offers great rewards. It also offers great risks. The key to seizing the opportunities and minimizing the risks is knowledge and preparation.

All that's required beyond that is common sense and an objective eye about the risks and rewards. And that's the purpose of this articleto give you a quick guide to those rewards and risks so you can decide if the field is the right choice for you. Let's look at the rewards first.

1)The first reward of commercial real estate investment is that it's relatively easy to get into. In other words, you don't need a PhD to be successful. In fact, you don't need a degree at all. What you do need is a willingness to learn by yourself and from professionals in the field.

2)The second reward of investment in commercial real estate is it offers a great variety of investment opportunities. Properties can range from duplexes to multi-unit dwellings to shopping centers. This provides you with a wide range of investment possibilitiesand profits!

3)The third opportunity lies in the ability to take advantage of leverage. Leverage is the use of other people's money (OPM) to finance your commercial real estate investments. Through the use of leverage, you can get into the market by investing little of your own capital.

4)The fourth reward of commercial real estate investment is the opportunity to achieve good returns. Historically, U.S. investors have received an average 8-10% annual return on such investments. Plus, unlike the stock market, commercial real estate is not volatile and doesn't suffer the sometimes extreme ups and downs of securities investments.

5)The fifth rewardand one of the best!is that commercial real estate investments provide long-term appreciation. In other words, such investments tend to increase in value over time, putting money in your bank account on a consistent and long-term basis.

6)The sixth reward is that commercial real estate investments generate income and can do it over long periods of time (e.g., apartment buildings, office buildings, etc.).

7)The seventh reward of such investments is that they provide three real tax benefits--deductibility, depreciation, and deferability. You can deduct normal expenses, depreciate your investments, and defer taxes through the Tax-Deferred 1031 Exchange.

8)The eighth reward of commercial real estate investments is that it permits you to build wealth. With solid purchases, you grow equity over time, and, all the while, you receive income. Talk about a great retirement plan!

Now, let's look at the other side of the coinrisks. Risks of Commercial Real Estate Investment

The first risk of commercial real estate is risk itself. By that, I mean that risk in commercial investments can be much higher, especially with larger projects such as office buildings or shopping centers. That's why it's important to keep a cool head and objective eye on every deal you consider. Remember this central pointthe numbers must always add up! Never, ever fall in love with a property!

The second risk of commercial real estate investment is lack of knowledge on your part. In this field, amateurs are goldfish swimming among sharks. My best advice is to start with small investments and learn as you go. The best way to learn is to find yourself a mentor who's willing to teach you the tricks of the trade. You may want to join a firm specializing in commercial real estate investments and work your way up.

The third disadvantage of commercial real estate investment is that it requires capital. Since you'll be dealing with professionals, you'll definitely want to "put your money where your mouth is." You'll go nowhere without proof of capital.

A fourth risk of commercial real estate investment is that it ties up capital. You have to have the ability to carry the costs of such investments over a long period of time. In most cases, commercial real estate is simply not easy to sell quickly so you'd better have the reserves to meet ongoing expenses.

A fifth risk of commercial real estate investment is a downturn in the economic cycle. If a recession occurs, jobs are lost and businesses suffer. In that case, your investments may produce little or no income for a while. As mentioned above, reserves of capital can help you weather such economic "storms."

So, there you have ita quick guide to the rewards and risks of commercial real estate investment. Now it's up to you to weigh those risks and rewards and arrive at a decisionto invest or not to invest. Good luck!

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