Commercial real estate has long proven to be one of the most stable and common types of investments in history, and the perpetual ebb and flow of supply and demand gives real estate inherent value in the world of investments. It has provided millions of investors the opportunity to generate positive returns, create a stable cash flow, and diversify their investment portfolios.
And under the new Trump administration, the belief is that those opportunities will remain aplenty. Let’s take a look at three of the most significant factors drawing people to invest, and how the new presidency and policies may impact those factors.
Income Potential and Cash Flow
Historically, returns from real estate investments are fairly attractive compared to alternative investment types such as stocks, bonds, or other commodities. Finding the right property may produce a return of somewhere between six and 12%, with the National Council of Real Estate Investment Fiduciaries (NCREIF) Index reporting an annual return of 12.7% in 2015.
That upward trend, in addition to Trump policies in regards to trading, may lead to higher inflation and subsequently higher cap rates on commercial property. Inflation, mixed with higher interest rates could help spur healthy capital gains on real estate investments.
Appreciation of Asset Value
Along with income potential and cash flow of the property, appreciation over a period of time is perhaps the most important reason to invest in real estate. Capital appreciation provides investors opportunities to amass significant wealth.
Through factors such as supply and demand, real estate property values can increase significantly. Increased demand drives rents up, and commercial property values are essentially built upon those rents. As mentioned, policies proposed by the new administration could likely lead to some level of inflation and higher interest rates, which could lead to increased rents and increased property values long term.
Commercial real estate is generally not purchased with 100% cash. It takes a combination of an investor’s contribution and a loan from a financial institution. Leverage is used to lessen the up-front cost from investors and to help increase the potential return on investment. And with proposed changes to the Dodd-Frank Act from the new administration, we may see a greater flow of capital available from banks in the somewhat near future.
This ability to purchase assets that exceed your immediate cash available allows you to build wealth rapidly. Let’s say the investor pays 20%, or $100,000, on a $500,000 asset, with the rest paid by lenders. If rents increase over time and you sell the property for $750,000,you may be looking at a 50% return on investment. But in reality, it’s a 250% return on your $100,000 down payment. So if managed properly, investors can make significant gains on their initial investments.
Ultimately, there is both risk and reward to investing in commercial real estate. It has proven through high returns, diversification, and security, to be one of the most viable investment classes within our economy. And new policy implementations from President Trump, a career real estate man, may mean that now is the time to invest in commercial real estate.