Discover 4 major economic forces creating urgency for smart investors to acquire commercial real estate right now! Have urgency today or you'll regret it later. Procrastinate at your own peril. Here's why:
1. Rising Interest Rates
Inflation is out of control; prices are soaring, and the value of the dollar is declining rapidly. This means your savings are worth less and the cost of commercial real estate ownership has increased. Everything from nails to appliances is more expensive! To counter the soaring inflation, interest rates are being raised. This poses two challenges for commercial real estate investors. As interest rates are raised, your mortgage payments increase, meaning you won’t be able to invest in as many properties. And with higher monthly mortgage payments, your cashflow will decrease, leading to a lower return on investment. Rising interest rates have a tremendous impact on the commercial investor and are one of the most compelling reasons to buy now!
2. Cost Segregation: Maximize Income Deductions
Cost segregation is the most powerful tax saving tool available to commercial real estate investors. It allows you to accelerate the amount of depreciation you can claim on your taxes in the first few years you own the property. Instead of depreciating it over twenty-seven and a half years, you can depreciate the building and contents over five years.
Bonus depreciation was implemented in the Jobs Act. It allows you to take the entire cost segregation depreciation in year one. In the first year that you own the property you can write-off 100% of the depreciation against your adjusted gross income. Why is this a BIG reason to buy now? Because 2022 is the last year you can take 100% of that cost segregation and write it off in the first year. In 2023 it will drop by 20% and continue each year until it is phased out. That means you need to buy your commercial property, cash flow, and do a cost segregation study NOW. Get that tax refund and buy another property now because the bonus depreciation is a temporary measure.
Again, cost segregation is a way to maximize your income deductions and taking advantage of the bonus depreciation is a BIG reason to buy now because as commercial real estate investors often our biggest expense on our properties are the taxes.
3. Rental Rates are Skyrocketing
Rental rates are increasing all around the country, and as a result so are property values. Is it still a good buying environment? Absolutely. What we're looking for in this kind of market are value-add opportunities. What is a value-add property? Here’s an example of how it works:
10-Unit Apartment Building: Over time you raise the rents $150/month.
Annual Increase: With 10 units, that's an extra $18,000 per year.
Property Value: Your NOI has increased $18,000. In a 6% cap rate area, you divide $18,000 by your 6% cap rate and the result is a forced appreciation of $300,000.
That is a phenomenal increase in value and it is possible in this market where rental rates are skyrocketing. Where do you find those deals? You’ll find them off-market. At Commercial Property Advisors, we train our students how to find sellers and how to work with them, developing a relationship, and then creating upside within the deal. For examples of real-world value-add deals, check out these protégé testimonials. These are deals are recent and prove that even in today’s market, you can find amazing value-add opportunities:
4. Increasing Demand for Apartments and Housing
Will rents continue to increase or is the rental market going to plateau? Well, there are four factors that seem to indicate demand for apartments is increasing and rents will continue to climb.
- Home builders can't keep up with demand: Currently in the U.S., we are between four to five million residential units away from satisfying the demand. When will the supply match the demand? It could be years and with today's economic conditions, I believe it will get worse.
- Home ownership is out of reach from many people: How many people, young or old can afford even the down payment to purchase a house when the home prices are out of sight? Those people have no choice but to remain renters.
- Rising interest rates have reduced the ability for people to qualify for a mortgage: As interest rates go up, the monthly mortgage increases, and the less home people qualify for until basically, with a fixed income, they can no longer qualify for an average home. Those people will remain a renter.
- Inflation is here to stay for now: That means the ability to save for a home is almost impossible because in this inflationary environment, the money put aside for a down payment on a home is now going to rising gas prices, more expensive groceries, and increased energy bills. Good luck buying a car now, car prices are through the roof. Just being in this inflationary environment is going to keep your tenants as renters.