A guy told me one time that there are two types of people in the world:  those that spend all their time trying to make their fortunes, and those that once they make their fortunes, spend all their time trying to guard them.  Regardless of whether you are in the first category or the second, there are 4 compelling reasons to invest in Commercial Real Estate (CRE) – especially as the alternative investments, like the stock market, bonds, etc., are yielding such a minimal return.

1.  Cash Flow – Cash flow is the most obvious of the reasons to invest in Commercial Real Estate, and this is what people are generally referring to when they remark about making “your money work for you.”  Whether we are talking about retail, office, industrial, or multifamily, CRE investments produce cash flows, and that is really what you are buying – future cash flows generated mainly from rent.  Now, investors vary wildly on what they do with the cash flows.  Some live off the cash flows while others plow all that money back into retiring whatever debt is on the property.  Regardless, everything from the value of the property to how it is managed is derived from the cash flows that the property creates.

2.  Principal Reduction –  Principal reduction may be the least obvious of the reasons to invest in Commercial Real Estate, though long-term, this could be the most powerful.  This point also makes the assumption that the investor in CRE has used some amount of debt to purchase the property.  This is the truth that your tenants who are paying rent are making your mortgage payments for you.  Their rent is reducing the principal that you owe on the property essentially building equity and increasing your net worth on a monthly basis – for you.

3.  Depreciation – Even though Ronald Reagan is one of my favorite presidents, he really put the screws to Commercial Real Estate in the 80’s when he signed the law that forever changed how depreciation was handled.  Without going into detail on its history, depreciation is a very simple deal at present.  You can depreciate commercial property over 39 years and residential property – to include multifamily – over 27.5 years.  This is what you hear people refer to as tax shelter.  Depreciation is a phantom expense on the P&L statement that lowers the taxable income resulting in lower taxes.  Be mindful of depreciation when it is time to sell, however.  At the time of sale, there is a 25% tax on depreciation which is called cost recovery which is due the following April.  You can avoid this tax by executing a 1031 Tax Deferred Exchange.

4.  Appreciation – Appreciation is simply the term for the value of the Commercial Real Estate going up in value over time.  Now, while the last few years have taught us the CRE doesn’t always go up in value, history tells us that most of the time it does.  And beyond appreciation that stems from the overall market improving, proper management of income producing CRE can easily increase Net Operating Income (NOI) and subsequently increase the overall value.  A first-time CRE investor must also be mindful of appreciation in much the same way the must pay attention to depreciation.  At a sale, currently, a 15% capital gains tax is assessed on the appreciation that has occurred since the property was purchased.  Like depreciation and the cost-recovery tax, the capital gains tax on the appreciation of a property can be deferred indefinitely by executing a 1031 Tax-Deferred Exchange.

While each asset class of Commercial Real Estate behaves a little bit differently, these 4 reasons to invest in CRE remain constant for any income producing property.  As you consider investing, which of these 4 reasons could be your motivation?