The Rewards and Risks of Commercial Real Estate Investment

The Rewards and Risks of Commercial Real Estate Investment
Investment in commercial real estate offers great rewards.
It also offers great risks. The key to seizing the
opportunities and minimizing the risks is knowledge and
preparation.

All that's required beyond that is common sense and an
objective eye about the risks and rewards. And that's the
purpose of this article—to give you a quick guide to
those rewards and risks so you can decide if the field is
the right choice for you. Let's look at the rewards first.

1)The first reward of commercial real estate investment is
that it's relatively easy to get into. In other words, you
don't need a PhD to be successful. In fact, you don't need
a degree at all. What you do need is a willingness to learn
by yourself and from professionals in the field.

2)The second reward of investment in commercial real estate
is it offers a great variety of investment opportunities.
Properties can range from duplexes to multi-unit dwellings
to shopping centers. This provides you with a wide range of
investment possibilities—and profits!

3)The third opportunity lies in the ability to take
advantage of leverage. Leverage is the use of other
people's money (OPM) to finance your commercial real estate
investments. Through the use of leverage, you can get into
the market by investing little of your own capital.

4)The fourth reward of commercial real estate investment is
the opportunity to achieve good returns. Historically, U.S.
investors have received an average 8-10% annual return on
such investments. Plus, unlike the stock market, commercial
real estate is not volatile and doesn't suffer the
sometimes extreme ups and downs of securities investments.

5)The fifth reward—and one of the best!—is that
commercial real estate investments provide long-term
appreciation. In other words, such investments tend to
increase in value over time, putting money in your bank
account on a consistent and long-term basis.

6)The sixth reward is that commercial real estate
investments generate income and can do it over long periods
of time (e.g., apartment buildings, office buildings, etc.).

7)The seventh reward of such investments is that they
provide three real tax benefits--deductibility,
depreciation, and deferability. You can deduct normal
expenses, depreciate your investments, and defer taxes
through the Tax-Deferred 1031 Exchange.

8)The eighth reward of commercial real estate investments
is that it permits you to build wealth. With solid
purchases, you grow equity over time, and, all the while,
you receive income. Talk about a great retirement plan!

Now, let's look at the other side of the coin—risks.
Risks of Commercial Real Estate Investment

The first risk of commercial real estate is risk itself. By
that, I mean that risk in commercial investments can be
much higher, especially with larger projects such as office
buildings or shopping centers. That's why it's important
to keep a cool head and objective eye on every deal you
consider. Remember this central point—the numbers
must always add up! Never, ever fall in love with a
property!

The second risk of commercial real estate investment is
lack of knowledge on your part. In this field, amateurs are
goldfish swimming among sharks. My best advice is to start
with small investments and learn as you go. The best way to
learn is to find yourself a mentor who's willing to teach
you the tricks of the trade. You may want to join a firm
specializing in commercial real estate investments and work
your way up.

The third disadvantage of commercial real estate investment
is that it requires capital. Since you'll be dealing with
professionals, you'll definitely want to "put your money
where your mouth is." You'll go nowhere without proof of
capital.

A fourth risk of commercial real estate investment is that
it ties up capital. You have to have the ability to carry
the costs of such investments over a long period of time.
In most cases, commercial real estate is simply not easy to
sell quickly so you'd better have the reserves to meet
ongoing expenses.

A fifth risk of commercial real estate investment is a
downturn in the economic cycle. If a recession occurs, jobs
are lost and businesses suffer. In that case, your
investments may produce little or no income for a while. As
mentioned above, reserves of capital can help you weather
such economic "storms."

So, there you have it—a quick guide to the rewards
and risks of commercial real estate investment. Now it's up
to you to weigh those risks and rewards and arrive at a
decision—to invest or not to invest. Good luck!

----------------------------------------------------
Jack Sternberg is a nationally recognized expert on real
estate investment who's been in the business for more than
30 years. Sternberg's deals have totaled over $750 million
and he's been to the closing table more than 1,500 times.
For more, visit http://www.askjacksternberg.com