Commercial Real Estate – Is It Too Risky?

February 24, 2023
min read

Commercial real estate is a potentially lucrative investment option for those looking to diversify their portfolio and benefit from steady income streams. However, it is not without its risks, and investors must weigh these risks before committing their money. In this blog post, we will discuss the various risks of investing in commercial real estate, the benefits of investing through a holding company, and why self-storage is a great recession-proof option.

Risks of Investing in Commercial Real Estate

1.     Market Risks: The real estate market can be volatile, and property values can fluctuate based on various factors, including economic conditions, government regulations, and market trends. This can result in significant losses for investors who invest in commercial real estate at the wrong time.

2.     Tenant Risks: One of the biggest risks associated with commercial real estate is the possibility of tenants defaulting on rent payments. This can result in significant financial losses for the investor and may take a long time to recover from.

3.     Location Risks: The location of a property is critical to its success, and properties in areas with declining populations or economies can become difficult to rent and maintain.

4.     Interest Rate Risks: Interest rates play a crucial role in the real estate market, and changes in interest rates can result in changes in property values. This can have a significant impact on the profitability of commercial real estate investments.

5.     Maintenance Risks: Commercial real estate investments require significant maintenance, and unexpected repairs and renovations can result in substantial costs.

Investing through a Holding Company

Despite these risks, commercial real estate remains a popular investment option due to its potential for long-term growth and steady income streams. One way to mitigate these risks is by investing through a holding company. A holding company is a company that exists primarily to own assets, such as real estate, stocks, and bonds.

Investing in commercial real estate through a holding company offers several benefits, including:

1.     Limited Liability: By investing in a holding company, investors can limit their liability, as the holding company, not the individual investor, is responsible for any debts or obligations.

2.     Estate Planning: Holding companies can also be used for estate planning purposes, as assets can be transferred to the next generation without having to go through probate.

3.     Tax Advantages: Holding companies can also offer tax advantages, as the profits from real estate investments can be sheltered from taxes, allowing investors to keep more of their profits.

4.     Diversification: By investing in a holding company, investors can diversify their portfolio and spread their risk across multiple assets.

Why Self-Storage is a Great Recession-Proof Option

Self-storage is a type of commercial real estate that has proven to be a recession-proof investment option. This is because the demand for self-storage units remains steady, regardless of economic conditions.

Self-storage offers several advantages, including:

1.     High Occupancy Rates: Self-storage facilities have high occupancy rates, as people always need somewhere to store their belongings, even during economic downturns.

2.     Long-Term Leases: Self-storage facilities typically offer long-term leases, which provides a steady stream of income for investors.

3.     Low Maintenance Costs: Self-storage facilities are relatively low maintenance, and the cost of repairs and renovations is usually borne by the tenant, not the investor.

4.     Tax Advantages: Self-storage facilities also offer tax advantages, as the profits from self-storage investments can be sheltered from taxes, allowing investors to keep more of their profits.

In conclusion, commercial real estate is a potentially lucrative investment option, but it is important to consider the various risks associated with it. By investing through a holding company, investors can limit their liability and benefit from tax advantages and diversification. Self-storage, in particular, has proven to be a great recession-proof option due to its high occupancy rates, long-term leases, low maintenance costs, and tax advantages. As with any investment, it is important to do thorough research, consult with a financial advisor, and have a clear understanding of the potential risks and rewards before committing to a commercial real estate investment.