Lots of businesses are allowing employees to work from home these days. This is a trend that will likely continue in the future. As a result, many real estate experts believe this will lower the demand for commercial property, driving prices down. Furthermore, opportunities are forming for new investors who want to get into commercial real estate for beginners.
New real estate opportunities include investment in commercial properties such as offices, apartments, industrial buildings, etc. Earnings from commercial property investment come from either rent payments or the appreciation of the value of the property.
Commercial real estate for beginners can also include investing in real estate investment trusts (REITs). REITs are similar to stocks; however, they represent real estate assets and pay dividends.
When it comes to commercial real estate for beginners, there are three types of income that you should understand: Earned Income, Passive Income and Portfolio Income. This model of income has been taught by Robert Kiyosaki, real estate investor. He discusses these concepts in his book, “Rich Dad, Poor Dad.”
Your J-O-B: Earned Income
If you work at an 8-5 job, working Monday through Friday, you receive earned income. You might be a manager, a cashier or a trucker. For example, you may be paid hourly or by salary. As a result, if you don’t work, then you don’t typically get paid. Essentially, you are trading your time for money.
There are 24 hours in a day and 168 hours in any given week. Most people work a 40-hour work week shift. However, even if you worked every hour of each day, there is a limit to how much money you can earn. Even if you wanted to work 30 hours a day (which is impossible), you cannot violate the laws of universe.
In addition, there are limits on taxation with earned income. The IRS has established tax rates for all earned income, based on your earning bracket. For example, a single person who makes $40,125 – $85,525 is taxed at a rate of 22%. Money is automatically taken from your salary each month. The tax money is then sent directly to the IRS. Although there are things you can do to reduce your tax bill, there’s not much wiggle room on how much the IRS takes.
Passive income is simply earning money with little or no effort. Moreover, with passive income, you earn money while you sleep or vacation. Although this idea may sound impossible, it is a secret that millionaires and billionaires have utilized for hundreds of years to become wealthy.
Common examples of passive income include owning commercial real estate for beginners rental properties. Of course, there are other examples of passive income, like stock dividends, high-yield savings accounts, annuities, and real estate investment trusts (REITs) as well.
Unfortunately, although passive income may seem like easy money, it’s not. Generating passive income requires upfront work that lays the groundwork for future income. It is not a get-rich-quick scheme. In addition, it may require some additional work as you move forward. For example, if you own a commercial rent property, you will be required to pay for property maintenance, improvements, taxes and insurance on your investment.
Methods to Make Money in Commercial Real Estate For Beginners
Rental Income, Appreciation, Tax Deductions, Creative Services
The most common way to make money in commercial real estate for beginners is to generate rental income. Rental income is a type of passive income that is generated from charging tenants of a property rent each month.
Examples of rental income at commercial properties include medical facilities, warehouses, business offices, strip shopping centers and the like. Ideally, commercial real estate for beginners involves selecting an area where growth is occurring or that is densely populated. The investor purchases commercial property in these areas and then leases space to tenants, generating passive rental income.
In addition, when searching for commercial property you want to maximize the quality of your investment. Purchasing commercial properties that require minimal improvements or renovations is best. Moreover, the property purchased should be at or below market value. Obviously, you don’t want to buy a property in the middle of a real estate bubble, which could be worth less the following year.
Next to generating rental income, appreciation of property values is the second most well-known way to generate income with commercial real estate. Property appreciation occurs when market prices increase overall or when improvements are made to a property.
Recently, the United States has seen significant increase in market prices across the board for real estate. In fact, many experts believe that the real estate market has been in a bubble and prices are at an all-time high.
However, even if the market didn’t lift the value of your commercial property, it may have increased simply as a result of capital improvements. For example, if you own an apartment complex, perhaps you added covered parking to the complex or installed a swimming pool. Both of these would be considered improvements, which would theoretically increase the value of the property. Appreciation, or an increase in the value of the property would only be realized upon sale of the property.
There is a great way to generate income from your commercial properties that many people don’t even consider. There may be opportunities at your properties for add-ons or additional services that you haven’t considered. For example, installing vending machines or charging for covered parking. The only limit to providing these services is your own creativity.
Many of these services require little or no expense, effort or improvement to the property. For example, having a third-party vendor install a vending machine can cost nothing. Yet, you can earn a percentage of sales from the vending machines by contracting with the vending company.
Tax Deductions and Depreciation
There are many tax deductions for commercial real estate property owners. In many cases, when properties are treated as a “pass-through,” a tax deduction can be taken. Moreover, the tax savings can mean thousands of extra dollars in your pocket.
There are also depreciation options for certain landlords to take advantage of. These allow property owners to deduct the costs of personal property, such as onsite equipment, appliances, etc., from their taxable income. Follow up with your tax professional for more information regarding tax deductions.
Alternative Methods for Commercial Real Estate For Beginners
Long Term Investment Income (Portfolio Income)
Portfolio Income from long term investments is earned is made by capital gains. Assets can be examples of portfolio income. For example, if you own stocks, bonds, property, etc., you have portfolio income. When you sell your assets, hopefully they have increased in value while you held them. As a result, during the sale you incur capital gains.
For example, let’s say you bought $1,000 worth of stock in 2018. Now, in 2020, you decide it’s time to sell the stock. The stock is now worth $1,500 in the market. When you sell the stock, you will realize a $500 capital gain or profit ($1,500-$1,000 = $500). Capital gains from assets like stocks and bonds are how Wall Street traders make money.
Learning about commercial real estate for beginners can also mean generating portfolio income. Even if you own a commercial property for which you collect rent, you can still realize capital gains as well. For example, if you decide to sell your commercial real estate investment, you may profit from the sale (assuming the property is sold for more than you paid for it).
Real Estate Investment Trusts (REITs)
A REIT, or real estate investment trust, is a company that owns and manages real estate assets. REITs take advantage of special tax savings, allowing them to incur minimal corporate income tax. In addition, a REIT pays dividends, a type of passive income for commercial real estate investors. Historically, many REITs have paid increasing dividends each year, which means your passive income stream might grow with little effort.
However, with any investment comes risk. Some REITs are inherently riskier than others. For example, a REIT fund that contains a large number of commercial property assets will be less risky than owning one REIT stock with less diversification. In addition, determining which REITs to invest in can require significant time for a business analysis of each business’s records.
Another risk with REITs is reduced dividend income. Historically, during economic downturns such as the real estate market crash of 2008, REITs lose significant value. When this occurs, dividend income can be slashed or removed completely.
Wrap Up of Commercial Real Estate For Beginners
As you can see, learning about commercial real estate for beginners can be a great way to create a source of income outside of an 8-5 job. In addition, investing in commercial real estate can be a secure way of earning long term investment income. Furthermore, investing money in real estate is generally seen as a safer bet than many equity market investments that may be in a bubble, such as stocks.
It is important to note that Piggy Bank Coins does not provide financial advice. We don’t endorse or recommend any financial investments. Instead, we provide information for educational purposes to those seeking knowledge regarding personal finance. However, in the spirit of transparency, note that the author is an investor in cryptocurrencies, precious metals and some equities.
In addition, The Federal Trade Commission (FTC) requires that Piggy Bank Coins disclose to readers that we may receive commissions when you click our links and make purchases. However, this does not impact our reviews and comparisons. We try our best to keep things fair and balanced, in order to help you make the best choice for you.