There are numerous reasons for which business companies invest in the real estate industry. Real estate acting as a real asset brings stable cash flow, diversification in investments, tax advantages, excellent returns, and possible leverage to build wealth.
Investing in real estate is always a win-win situation for business companies because its value is only meant to rise with development. The real estate industry serves as an excellent opportunity for investors who want to build significant wealth with negligible risks. The tax deductions and breaks will also reduce the tax liability on the companies’ books. Real estate is undoubtedly a trump card for business companies investing in real estate.
Therefore, to understand why businesses are always eager to invest in real estate, we have listed the most practical reasons behind their investment. Read below to find out more.
Significant Reasons Why Business Companies Invest In Real Estate
1.) Tax Breaks and Deductions: The critical reason business companies invest in real estate is to benefit from several tax breaks and deductions that will help them considerably when filing company returns. Generally, a company can deduct the fair and actual cost of owning, operating, and managing a property.
Companies can also depreciate the cost of buying and improving the property over its useful life, determined as 39 years for commercial properties and 27.5 years for residential properties. If they do so, they will enjoy years of deductions in the balance sheet that will help them lower their profits on the books. Therefore, reducing the tax burden as well. Using a 1031 exchange, businesses will be able to defer capital gains and enjoy another tax perk.
2.) Stable Cash Flow: The net income left from a real estate investment after paying for operating expenses and mortgage payments is called cash flow. Businesses invest in real estate because of the industry’s ability to generate cash flow. In several cases, this cash flow strengthens when companies timely pay down their mortgage and build up their equity.
3.) Appreciation: Business companies earn real estate investments through rental income, appreciation, and profits made by business activity performed using the property. Over time, real estate value increases, and if companies have made a good investment, they will be able to make a good profit at the time of selling the property. As time passes, property rent also appreciates, which can result in higher cash flow.
4.) Portfolio Diversification: For companies, investing in real estate is an opportunity to make their portfolio diversified. Real estate is considered low and, in a few scenarios, even negative correlations with other major asset classes. Lower or a negative correlation implies that adding real estate to a diversified assets portfolio can lower portfolio volatility and offer a higher return for each unit of risk.
5.) Building Equity and Wealth: Paying the property mortgage builds a company’s equity, and equity is an asset for the company that is a part of its net worth. With the increase in equity, business companies have the leverage to buy more properties and increase their cash flow, hence more assets.
6.) Competitive Risk-Adjusted Returns: Several factors, such as asset class, location, and management, affect the returns from real estate investments. It is difficult to beat the average market return or the returns of the S&P 500. However, for the past 50 years, the average annual return from real estate investment is approximately 11%, which is quite decent.
7.) Real Estate Leverage: To make investments reap more return, investors make use of Leverage, which means using borrowed capital or several other financial instruments, for example, debts. For instance, if a business makes 30% of the total property value as a down payment, it will get 100% ownership to that property there, and then, this transaction is called leverage. Classified as a tangible asset, real estate can even be served as collateral, making financing easy and quick.
8.) Inflation Hedge: GDP growth and the demand for real estate shares a positive relationship that has given rise to real estate’s inflation hedging capability. With the expansion in the economy, the need for real estate results in higher rent, giving higher capital values. Thus, by transferring some inflationary pressure onto the tenants and bringing some inflationary pressure via capital appreciation, real estate can maintain the purchasing power of capital.
Lastly,
I hope the above-stated reasons have made you understand why business companies invest hugely in real estate. If businesses are skeptical about directly investing in real estate, they can approach Real Estate Investment Trusts (REITs). The latter offers investors a medium to invest in real estate without owning, operating, or financing any properties. Businesses can even recommend their trusted individuals qualified and looking for the best paying jobs in real estate investment trusts to help them make the right investment choice.
Author Bio:
Hanna Flores is a passionate blogger. She loves to share her thoughts, ideas, and experiences with the world through blogging. Hanna Flores is associated with News Stoner, World News Inn & Exclusive Rights, WorthyToShare.
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