About 90% of American millionaires made their fortunes in the real estate industry. This is partly because commercial property investments tend to become more valuable over time, create positive leverage situations, and offer a predictable cash flow. For instance, on average, the value of commercial properties in the U.S. increases by 2% to 3% annually. It is worth noting that with proper management, a commercial property can generate income throughout the year.
Benefits of Investing in Commercial Property
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Builds Equity
In real estate, equity refers to the percentage of a property that a person owns free and clear. More specifically, it is the difference between your mortgage debt and the market value of your property. For instance, if the market value of your rental units is $500,000 and you owe the lending company $250,000, then your equity is $250,000. Typically, every real estate investor aims at increasing their equity. As the value appreciates, your equity increases too, making it easier for you to refinance your mortgage. Moreover, you can use the rental income you receive to service your mortgage and increase your equity.
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Stable Cash Flow
A commercial real estate property is like any other income-generating asset. According to IBISWorld, the U.S. commercial real estate industry is set to increase by 3.8% in 2021. This essentially means that provided you keep your occupancy rate high throughout the year through effective property management, your investment will create a stable and sustainable cash flow, allowing you to pay your bills and meet your financial obligations, such as repaying your mortgage loan, on time. Moreover, it will allow you to build a cash reserve that you can use to invest in other similar opportunities as soon as they arise.
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Tax Deductions
As a property investor, you have to pay certain property-related taxes, which tend to add up over time. Fortunately, the federal government gives tax benefits and deductions to eligible commercial real estate investors. These tax breaks and deductions include, among others:
- Depreciation deductions for income taxes – Here, the federal government allows investors to deduct the depreciated value of the property from their annual income tax. For example, if your residential property depreciates by $2000 over the years, you are free to deduct this amount from your income tax.
- Non-mortgage tax deductions – Here, investors can deduct non-mortgage costs such as repairs, maintenance, and property management expenses from their income taxes.
- Interest expense tax deductions – This allows investors to deduct interest on their commercial mortgage off the income taxes.
- Reduced tax burdens for beneficiaries – Here, if the investor passes away, their beneficiary will only pay taxes on the appreciated value of the commercial property and not the market value. For instance, if your commercial property appreciates by $1 million before you die, your beneficiary will only pay taxes on the $1 million instead of the total property value.
- Qualified Business Income (QBI) deductions – This allows investors to deduct a portion of the qualifying income from their annual income taxes.
If you want to apply for tax deductions on your commercial property, ensure you consult an expert to guide you, but first, you need to find out if you are eligible.
These are the top three benefits of investing in commercial real estate. At Fidelity Mortgage Lenders, we can help you secure the right commercial real estate loan to meet the unique needs of your business. To get started, call us today at 800-752-9533.
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