By employing strategic leverage, commercial properties have the potential to produce regular income for their owners. The income is derived from the rents paid by tenants and it is first used to pay the property’s operating expenses like taxes, insurance, maintenance, depreciation, and debt service. Everything left over, it is distributed to investors in proportion to their share of ownership.

First, commercial properties are typically owned in a Limited Liability Company (LLC), which is a single asset vehicle created just for the purpose of owning and operating the property. The LLC is a tax advantaged “pass through” structure that avoids the double taxation commonly seen in a corporation, meaning that profits are not taxed at the entity level. Instead, they “flow through” to investors where they are taxed at the individual level, according to the tax bracket of each individual.

Second, when a property is sold, profits are taxed differently than ordinary income. Each individual’s tax bracket is unique and the tax code is always changing, but the highest long term capital gains tax rate is in the neighborhood of 25% while the highest ordinary income tax rate is in the neighborhood of 37%. In short, capital gains have a lower tax rate than income, which is advantageous to commercial real estate investors.

Real estate is a “hard” asset, meaning that can be physically touched and seen by investors. For some this is a source of comfort relative to the pieces of paper that signify stock or bond ownership. Property values may rise or fall, but this tangible asset won’t go anywhere. There will always be value to the investment.

Historically, commercial real estate price movements tend to only be loosely correlated to price movements in other asset classes like stocks and bonds. As such, it provides an investment portfolio with additional diversification. So when stock market prices are down, real estate prices may be flat or even rise, which benefits portfolio performance as a whole.

Commercial real estate is a hedge against inflation. As the economy grows, and more is charged for goods and services, landowners may increase the rent they charge. Growth in the economy means that people earn more money, so they can pay more for rent.

Commercial real estate investment opportunities exist on a spectrum of risk. At the lower end of the CRE risk spectrum are properties like grocery-anchored retail, single tenant triple-net leased assets, certain real estate investment trusts, class A office buildings, or multifamily. While these assets may provide an overall lower return, they also tend to be far more stable, akin to a corporate bond. These lower risk-type investments tend to be a good fit for investors who prioritize preservation of capital over earning the highest possible returns.