The beauty of investing in real estate lies in the different investment options available, and one of the main options we see the most opportunities in 2024 is commercial real estate: office buildings and condos, retail and industrial spaces, warehouses, medical facilities, restaurants, etc. Any space destined for business activities falls into this category and offers many benefits for landlords and business owners. If you are in the market to buy a commercial property, these are the perks you should expect.
Why You Should Buy a Commercial Property
Landlords
Whether you are a new landlord or a seasoned one, here’s why you should include commercial property in your portfolio:
1 – Diversification
Adding a commercial property to a real estate portfolio can help landlords diversify their investments. This diversification strategy can spread risk across different types of assets, resulting in a more balanced and resilient investment portfolio.
2 – A More Stable and Higher Income Stream
Commercial condos and other variants of commercial property can give a stable and predictable income stream through leasing. By renting out individual units to different businesses, landlords can diversify their tenant base and reduce the risk of relying on a single tenant.
While commercial real estate typically has higher upfront costs, it can also offer higher returns than residential properties. Businesses typically sign longer-term leases at a higher rent price, potentially reducing your break-even period and increasing your ROI.
3 – Triple Net Leases
Commercial leases are often triple net (NNN), in which the tenant is responsible for paying not only the base rent but also the operating expenses associated with the property including utility bills, taxes, property insurance and maintenance costs for the common areas. The landlords are typically left in charge of structural repair costs.
Landlords often favour this lease structure because it helps stabilize their net income, as the renter handles a significant portion of the property’s operating costs. For tenants, a triple net lease provides transparency about the total cost of occupying the space, as they are directly responsible for various expenses associated with property ownership.
4 – Tax Benefits
Owning a commercial property comes with some attractive tax benefits, especially accelerated depreciation through capital cost allowance (CCA). Canadian tax laws state that real estate properties may wear and tear over time, losing value. This allows commercial property owners to cover depreciation and improvement costs (not regular maintenance costs), depending on the type of property and the date of acquisition, by claiming the percentage of depreciation in which their property is classified.
This example from the CRA illustrates how the CCA deduction works:
“Last year, Abeer bought a rental building for $60,000. On her income tax and benefit return for last year, she claimed CCA of $1,200 on the building. This year, she bases her CCA claim on the remaining balance of $58,800 ($60,000 − $1,200).”
A rental property owner can claim the CCA every year, but the remaining balance declines.
Tenants
If you’re currently a tenant renting out the place where you run your business, here’s why you should take the step and own your business facilities:
1 – Equity Buildup
Owning a property allows business owners to build equity over time. As you make mortgage payments, a part of the amount goes towards the principal, contributing to the ownership stake in the property.
2 – Stability and Control
Property ownership provides stability and control over your business location. You will have the flexibility to customize and manage the property according to your business needs, allowing you to create a tailored space that suits and reinforces your brand identity without being subject to the restrictions of being a tenant.
3 – Long-Term Cost Stability
While upfront costs may be higher when purchasing a property, owning gives business owners long-term cost stability. Unlike leasing, where rent payments increase over time, a fixed-rate mortgage ensures predictable monthly payments.
4 – Potential Rental Income
If you have excess space in your commercial property, you can lease it to other businesses, generating rental income that can offset mortgage and other ownership costs.
5 – Future Expansion and Growth
If you plan for future expansion or growth of your business, starting to do it within your property may be one of the most convenient ways to do it. Owning the facility provides the flexibility to modify or expand the premises your new projects and ventures need.
6 – Legacy and Succession
Owning your business property can be a key asset in long-term planning, especially for family businesses. You can pass down your entire business operations to the next generation or use it as part of a succession plan.
Buying a Commercial Property Is a Wise Decision
Buying a commercial property is a smart investment move for both landlords and tenants. With proper financial planning and market research, you can get a commercial property that provides a stable and versatile source of income, a balanced portfolio, and the freedom to make your business evolve and grow without leasing restrictions.
If you’re already a commercial property owner in the Calgary area and need help to take care of your investment, contact us to get assistance from commercial property management specialists.
