“Owning commercial real estate is out of my reach”, “it is too expensive”, “it’s hard to manage and maintain”, “it’s risky”, “it’s a bad investment”, “it’s for rich people”… These are assumptions that far too many residential landlords make—and they are FAR from the truth. The truth is that owning a commercial property is neither difficult nor out of reach for most landlords. Owning a commercial property is easy, cost effective, and a good investment, which is why residential landlords should seriously consider switching over to commercial real estate.
Many landlords are unaware that they can do a 1031 exchange to sell their residential rental property and purchase high quality commercial real estate. The IRS “like-kind” rule for 1031 exchanges does not mean duplex-for-duplex or residential-for-residential. It means investment property for investment property, which allows residential for commercial, duplex for retail, raw land for medical services, or any other combination of investment real estate.
Owning a Commercial Property is Easy
The belief of residential landlords that owning a commercial property is hard, a lot of work, or out of reach, could not be more false. By co-owning a fully-managed, recession resilient commercial property with a long-term NNN lease offered by Millcreek Commercial, a residential landlord can easily take advantage of this asset class. NNN leases are foreign to most residential landlords, but they are common in commercial real estate. A NNN lease puts the burdens of paying property taxes, insurance, and utilities, as well as maintaining the property and making repairs, on the tenant instead of the landlord. This makes owning a commercial property much easier than owning a residential property. Not only is it easier, but it allows the landlord to spend more time doing what they love, rather than on maintenance and repairs.
In addition to the ease of owning NNN properties, having a lease administrator (similar to a property manager) makes owning commercial real estate even more advantageous. The lease administrator takes care of rent distribution, communication between tenant and co-owners, communication between the co-owners themselves, and ensures the property is being cared for and the lease is being enforced. They charge a nominal fee for this service and advertised cap rates reflect this cost.
Owning a Commercial Property is Cost Effective
Another belief that many residential landlords hold about commercial real estate is that it is expensive. While in a sense this is true, it does not make owning a commercial property out of reach. Co-ownership structures like tenant-in-common make owning a commercial property possible for almost all residential landlords. With tenant-in-common, you can purchase a percentage of a commercial property and receive that percentage of the monthly rent. This means you can purchase part of a commercial property with a little as $100,000 and reap the benefits of this asset class—generally reserved for investors with much more capital. Tenant-in-common ownership is deeded interest in the property, and is a way of holding title.
The low cost of entry to purchase commercial real estate isn’t the only cost effective benefit: the low expenses and high cap rates make this real estate asset class much more attractive over residential real estate. Landlords can leave behind the costly maintenance and repair calls, utility bills, property taxes, and insurance premiums when they 1031 exchange into a fully-managed commercial property with a NNN lease from Millcreek Commercial. For example, take a look at this Family Dollar | Dollar Tree in Valley Head, Alabama! View our whole inventory here.
Owning a Commercial Property is a Good Investment
Some residential landlords assume that commercial real estate is a risky investment. While there is always risk in investing (and risky investments do exist in commercial real estate), there are several types of commercial properties that carry less risk than a residential property. Commercial properties typically have long-term leases (which our properties do), such as 10, 15, and 20-year leases. Some properties have national credit rated tenants with corporate guaranteed leases backed by billion dollar corporations. With a 20-year lease and a strong corporate guarantee, commercial real estate is a solid low-risk investment. This is why a Millcreek Commercial Property is a great 1031 exchange option for investors looking for safety, security, and stability.
When I have spoken with residential landlords about their retirement plans for their rentals, I generally hear two responses: “I plan to keep them during retirement”, and “I plan to sell my rentals and live on the proceeds”. The problem with the first plan is that when they get into their 70s, most of them have a hard time properly caring for the properties. The maintenance, management, and tenants get to be too much as the residential landlord becomes older. Instead, these landlords would rather spend more time traveling, visiting family, and enjoying their favorite hobbies. Being a landlord no longer fits their lifestyle. They would rather have something more passive and hands-off that would still give them a monthly rent check.
The problem with the second plan of living on the proceeds is that residential landlords usually haven’t considered the tax implications involved in selling their rental properties. The capital gain on the property would be taxed at upwards of 15-20%. The IRS assumes depreciation was taken on the property, which is taxed as depreciation recapture at 25%. State income taxes come due on the gain, another tax which varies by state, and can be as high as 13.3%. Some landlords would be liable to pay another 3.8% for the Net Investment Income Tax (NIIT), as part of the Affordable Care Act. In some cases, the total tax liability can be as high as 40%, or more. In addition to the taxes taking an enormous chunk of the investment, there can be other implications of “just paying the taxes”. Social Security, Medicare, and other benefits can be affected. This can cost hundreds, if not thousands of dollars in lost benefits and increased costs due to the higher reported income. These factors should be considered by all residential landlords.
After learning of these consequences, residential landlords are pleased to learn that doing a 1031 exchange into a commercial property completely solves these issues, preserves their monthly income, and relieves them of the headaches and time consuming management involved in owning a residential rental property.
Residential landlords who are looking for a property that is easy to own, is cost effective, and a good investment, should consider investing in a Millcreek Commercial Property. With the combination of a long-term NNN lease, a corporate guarantee, and debt-free tenant-in-common offerings, the properties offered by Millcreek Commercial are perfect for residential landlords. Want something more passive and hands-off while still providing monthly income and allows you to defer capital gains taxes through a 1031 exchange? Schedule a consultation with our team here to get started.
Every residential landlord should switch to commercial real estate.