Invest in Commercial Real Estate to Secure Your Future Against Inflation.
It’s no secret that inflation is a huge problem in our economy right now. The cost of goods and services is continually rising, and it’s becoming more and more difficult for people to make ends meet. One way to protect yourself from the effects of inflation is to invest in commercial real estate.
Commercial real estate offers many benefits that can help you secure your future against inflation. In this blog post, we will discuss the different ways that commercial real estate can help you hedge against inflation. We will look at the different sectors of real estate investing and how they can help you safeguard your finances against rising prices.
If you’re looking for a way to protect yourself from the effects of inflation, commercial real estate may just be the ticket you’re looking for.
It could be the best decision you ever make.
As an investor, one of the smartest things you can do is to invest in assets that will hold their value or even increase in value over time. This is why investing in commercial real estate can be such a wise move.
Not only does commercial real estate offer the potential for either or both passive and active income, but almost inevitably it will appreciate in value over time. This means that your investment will be worth more in the future, even after inflation has taken its toll. That is why we often hear the adage, time in the market beats, timing the market.
What Is Commercial Real Estate
Commercial real estate is any property that is used solely for business purposes. This includes office buildings, retail space, warehouse, multifamily, mobile home parks, RV parks, industrial, and self-storage. It is different from single-family residential real estate, which is property that is used for housing. Multifamily housing, though, is generally classified as commercial.
Office, retail, and industrial tend to have long-term leases. They can range in length from 5 to upwards of 20 years. This provides less ability to adjust rates to inflation, but it does provide assurance of a reliable stream of income.
Multifamily housing, self-storage, mobile home parks, RV parks, and other forms of hospitality properties have shorter leases. Multifamily leases are typically for 12 months. Self-storage is month-to-month. And hospitality has no lease at all—rates can be adjusted almost daily.
Of course, rental income isn’t the only thing you need to consider when investing in commercial real estate. But it is an important factor to keep in mind.
Why Invest In Commercial Real Estate
There are a number of reasons to invest in commercial real estate. First, it can be a very profitable venture. If you purchase the right property and have it managed well, you can see a significant return on your investment.
Another reason to invest in commercial real estate is that it is a tangible asset. This means that it has a physical presence that you can see and touch. It is not something abstract like stocks or bonds. This can give you a greater sense of security knowing that your investment is something concrete.
The Income Hedge
In general, investments that offer the potential for high returns can also be more volatile. This means they can go up or down in value, and you could lose money if you sell when the market is down.
However, commercial real estate tends to be less volatile than other investments, like stocks and mutual funds. Also, returns tend to be higher at the same time providing a more reliable cash-flowing stream of income. This makes it an ideal investment for those who want to hedge against inflation.
Of course, there are still risks associated with commercial real estate. For example, if a tenant defaults on their lease, you could be stuck with vacant property. But compared to the stock market, commercial real estate is considered by most real estate investors to be a more secure investment.
Property Values and the Importance of Cap Rates
Single-family homes are appraised and valued based on market trends. Commercial properties are valued very differently. The value of any commercial real estate property is based on its Net Operating Income (NOI). NOI is simply the rental income from the property minus any operating expenses.
To calculate the value of a commercial property, you take the NOI and divide it by a rate known as the capitalization, or cap, rate. The cap rate is essentially the return that an investor expects to earn on their investment.
For example, if an investor is looking for a 10% return on their investment, they would use a cap rate of 10%. So, if the property has an NOI of $100,000, the property would be worth $1 million. ($100,000/$0.10).
Now, here’s where things get interesting. Cap rates generally correlated to interest rates. There is no rule that states that they must, but they almost always do. As interest rates increase, so do cap rates. In contrast, as cap rates increase, the value of the property decreases.
To put it simply, when interest rates go up, the value of commercial real estate goes down.
But it’s important to remember that rent increases don’t lead to inflation. Rather, rental rates react to inflation. So as inflation increases, rents also increase and so does the NOI. Therefore, even though increasing interest rates put a crunch on property values, the income from the property will actually increase.
In other words, while higher interest rates may not be good news for property values, in the end they can actually be beneficial for commercial real estate investors.
Of course, no investment is without risk. The biggest challenge when it comes to commercial real estate is predicting market demand. However, if you do your homework and choose properties wisely, investing in commercial real estate can be a great way to secure your financial future against inflation.
History tells us that knowledgeable investors tend to move toward hard assets during inflationary periods. Thus, even though it may seem logical that investment money would decrease, counterintuitively commercial real estate investments tend to remain strong and demand relatively high. The continued demand then tends to balance out the increase in cap rates.
Lastly, capital markets often tighten during periods of inflation and increasing interest rates. Nevertheless, commercial real estate still remains easier to finance than other types of property. Banks and other lenders are more willing to give loans for commercial property than they are for residential property. This makes it easier to get the financing you need to purchase a property.
If you are thinking about investing in commercial real estate, there are a few things you should keep in mind. First, make sure you do your research. There are a lot of different properties out there, and you need to find the one that is right for you.
Second, consult with a professional to get their opinion on the property you are interested in. They will be able to tell you if it is a good investment or not.
Finally, make sure you have the financial resources in place to make the purchase. Not necessarily your own. Real estate investing is one of the few investments where it often makes more sense to use other people’s money rather than your own.
Commercial real estate can be a great investment, but it is important to do your homework before you make any decisions.
If you are looking for a property that will appreciate in value, commercial real estate is a good option. The demand for commercial property is often more stable than the demand for residential property. This means that you are less likely to see drastic changes in the value of your property. You should still keep an eye on the market, but you can feel confident knowing that over time the value of your property will overcome market fluctuations.
When you are considering investing in commercial real estate, make sure that you are aware of the risks involved. Just like with any other investment, there is always the potential for loss. Be sure to do your research and understand the risks before making any decisions.
Confused and Uncertain?
With so many investment options, confusion as to where to invest leads to inaction. Schedule a FREE – NO OBLIGATION – NO STRINGS ATTACHED call. Or email me with your questions and thoughts at allen@SteedTalker.com. I’ll help you sort it all out, and you’ll soon be on your way to prosperous investing to live more abundantly in all areas of life.
About the Author -- Dr. Allen Lomax
With careers in academia, podcasting, and real estate investing, Dr. Allen Lomax inspires us to break open our minds’ secrets to discover individual and universal well-being. Through passive real estate investments, he helps enlightened investors create time freedom to live abundantly in all life’s areas.