Using Commercial Investment Properties to Diversify Your Portfolio
When discussing investments that should be part of anyone’s investment portfolio, commercial real estate investments need to be a major consideration.
Numerous experts in financial planning have a 20% ratio of income property as a necessary component of the average economic portfolio of sophisticated investors.
There are several critical reasons why investment properties are an excellent way of diversifying your portfolio. First of all, commercial income properties are safer and more conservative investment.
The income you gain from them is long-term and more stable than stocks, bonds, and commodities, which are quite volatile. There are also numerous tax advantages, especially when investing in 1031 exchange properties.
The Triple Net Property Is Management-Free
A triple net property – also known as an nnn property – are not only are far safer if properly identified for ownership, but they also have the distinct advantage of no management responsibilities or expenses on the part of the investor.
This allows you to benefit from a passive income stream that bring depreciation benefits against the income collected. In the end, if the investor decides to sell the property for a profit there would not be a capital gains taxes if the commercial income investor decides to do a 1031 exchange or a starker exchange delaying any tax on profit or recapture of depreciation taken over the ownership period.
Most triple net investments are long term leases with additional increases in rent over time and have the tenant paying for all expenses associated with the land and building including real estate taxes , insurance, maintenance and utilities. Over ten year leases are more desirable with non recourse financing based on the credit of the tenant and location of the property.
Of course the location in the city and state is important for as we all realize there are growth areas verses non growth areas of the USA.
The type of building is important for specialized buildings are not as desirable as generic type structures that have a variety of uses for future tenancy if needed. For example, a rectangular box as a normal retailer like a dollar store verses a Starbucks that has far less use to most other tenants than a coffee shop.
High rent going in per square foot is not desirable for the possible loss of that tenant and the next tenant willing to pay the same rent may be unlikely. The cost of fix up and changing type of tenancy along with loss of rent with vacancy and leasing costs could hurt the overall internal rate of return or what is called IRR.
Investments In Triple Net Property
Most expectations of real estate investments should be between 8% and 10% IRR which is not the same as cash flow or net income. The IRR is based on the overall holding period taking into consideration the sale at the end and the profit that was earned along with the net income produced over years which was based on the equity placed into the property from day one.
This type of investment requires a team of top professional guiding the commercial real estate investor namely a real estate broker, lawyer and CPA . Trying to save on these instrumental pieces of the puzzle will most likely result in a poor return.
Purchasing property with a tenant that has a better chance of stability being in a segment of longevity like that sell necessary products not optional things the public can do without. Food is primary and considered a staple item, whereas new fads or new items that entertain kids most likely won’t be around that long.
