Investors
Commercial investment is a lot like building a bridge out of puzzle pieces and each piece insures the financial performance of an investment.
Commercial investors are market informed, studious and deliberate when it comes to investing in commercial real estate. Smart commercial investors have what’s known as the ‘investment cycle’ in mind with each purchase. This investment cycle mindset includes decisions related with when to buy and when to sell scenarios.
Commercial investors are typically long term with respect to their perspective and seldom act in emotional or random fashion. The objective of a sophisticated commercial investor is long term wealth accumlation and cash flow.
The PACG Commitment to Commercial Investment
No one knows the ins and outs of commercial investment better than the professional members of PACG.
Each PACG member is dedicated to assisting new commercial investors, current owners and tenants with critical property analysis and investment strategies that help meet specific financial objectives.
PACG is an organization that helps investors determine and build the appropriate investment bridge that will take them to the predetermined destination.
Two Major Approaches to Investment
There are two major types of investment strategies a person might use to build wealth and cash flow.
The first type of investment strategy is known as “Indirect Investment” and consists of things like stock trading, buying bonds and notes, investing in mutual funs, commodities, option trading or, even currency trading.
There are many forms of indirect investment. It is a know fact that indirect investments can contain high volatility, risk, speculation and are prone to huge up-and-down cycles. Those who engage in indirect investment do so knowing they do not control or own the investment(s), they just participate in them as an investor.
The aspect of ownership is perhaps the biggest difference between indirect investments and commercial real estate investments.
One of the benefits of indirect investment strategies is their ability to provide an ivestor with liquidity or, the ability to get in and our easily by selling.
The second type of investment strategy is known as ‘Direct Investment’ and is characterized by because the investment is owned and the owner has some measure of direct management and control over the performance of the investment.
Commercial real estate and to some degree, residential real estate fall into this category. This type of investment is obviously less ‘liquid’ than some forms of indirect investment because it take more time to divest of the investment and to convert it to a create a cash component.
Direct investments in commercial real estate are designed to create maximum performance over the long haul, not a quick kill in the market. Commercial real estate investment is extremely deliberate and contain less speculation.
Direct investment approaches include things like business ownerwhip or partnerships, residential real estate purchases of properties consisting of one to three units and of course commercial real estate investment which generally is considered to be four units or more, zoned specifically for commercial use.
Naturally, PACG is an organization that encourages commercial real estate investment and we believe that such investment is a wise consideration in just about any market.
Ten Reasons to Investment in Commercial Real Estate
1. Direct Ownership. Unlike indirect investment strategies where the investor does not own or control the asset, with commercial real estate YOU own the property, control its potential and manage it with direct control.
2. Passive Equity Accululation. One of the primary benefits of commercial real estate investment is its ability to provide the investor with equity accumlation provided by others, including tenants, other investors and lending institutions. This is known as passive equity accumulation because the owner is not the sole provider or guarantor of financial performance.
3. Income Potential. Commercial real estate investment is constantly fueled by the income or, what we call cash flow. When you invest in commercial real estate you typically do so to generate short and long term income. Because of the nature of commercial real estate investment and its basis in fact rather than emotion, its income is usually predictable and transferable as a leverage strategy when moving from one property to the next.
4. Management. Commercial real estate affords its owner with the option of self-management or professional managment, depending on the size, scope and sophistication of the property. In any case, unlike many other forms of investment, the management of commercial real is always direct because the owner has a straight line to the property or propety management person or company. This brings investment empowerment to the owner.
5. Tax Benefits and Shelters. Commercial real estate investment delivers powerful and myriad tax benefits to the investor. It is likely that an investor can purchase and own an investment property with cash flow without paying any income taxes or, by deferring the taxes while accummulating wealth.
The IRS permits commercial real estate owners to reduce taxable income by deducting all operating expenses, interest payments, loan fees and commissions. A commercial real estate property owner can depreciate or ‘write-off’ a property’s wear and tear against its income, a concept the IRS calls “cost recovery”. The IRS currently allows an investor to depreciate property costs over 27.5 years for apartments and 39 years for other commercial property types.
6. Fixed Asset with Lease Value. Commercial proprety is considered a fixed asset with the real property having its own value and the cash flow or lease values having a value and the two values forming the total property gross market value.
Commercial properties are generally purchsaed and sold based upon a set of investment formulas that include net operating income, lease terms and conditions and the cost of financing.
7. Historical Performance. On June 26, 2008, the closing stock price for General Motors (GM) was $11 a share. That’s the same price that it traded for in December 1986, 22 years ago (adjusted for splits and dividends). Of course, we all know that GM filed for bankruptcy in 2009, making its stock price essentially zero.
It is difficult to find a commercial property today that has not apprecitated in value over the last 25 years.
In a new Yale University study by Roger G. Ibbotson and Baruch College’s Jack Clark Francis, both of them finance and economics professors, it was reported that commercial property values in general have gone up 9.5% annually since 1978.
The S&P 500 had, until late, a 22-year historical 13.4% annual return, includes dividends as compared to the Ibbotson/Francis 22-year annual commercial property return, of 9.5%, that also ignores cash flows receipts and is primarily focused only on change in commercial values measured over time.
As a commercial real estate investor you have the opportunity over time to earn income from cash flows produced as a result of your ownership and this capital can actually be greater thatn the proceeds you derrive from the future sale of a commercial property.
The return and prifits of commercial real estate investments have been known to be double and even triple the S&P returns.
8. Appreciation/Depreciation. This is called the ‘double whammy’ benefit to investing in and owning commercial real estate because owners have superior depreciation benefits granted by the IRS and of course, the historical appreciation levels of commercial property.
9. Market Location Preference. This principle of commercial real estate investment is a powerful one because it allows a commercial property owner to sell and roll proceeds from one transaction in, for example, Los Angeles, California to another property in Tampa, Florida.
As local commercial property values ebb and flow, a commercial real estate investor can seek alternative markets in which to reinvest proceeds from a sale via IRS proeprty exchange rules. This allows the investor to seek the best markets available for his/her investment.
10. Financing. Commercial real estate invesment is primarily about (i) the cost of money used for acquisition and (ii) the contempory cash flow at the time of purchase and finally (iii) the strength of the leases and tenants.
Each of these three ingredients form the financing triangle and the later two ingredients are of importance to lenders and investors, since they form the debt service guarantee for the property.
Financing commercial property involves traditional lenders such as banks but also involves creative financing between sellers and buyers, each method providing
Locate a Commercial Investment Expert
PACG provides new and experienced commercial real estate investors with access to the best brokers and agent in central and northern Arizona.
Please visit our Member Page to locate and contact one of our experienced members. Or, if you prefer, use our Member Search tool in the right column of this website.
