Historically, foreign nationals have focused their real estate investments in the United States on condominiums. Condominiums are relatively attractive to foreign buyers because they offer an easy, turnkey package of amenities, luxury, and security. However, the return on a condominium investment comes slowly, if ever. Often a condominium owner will not realize a significant return until they sell their unit and the ability to sell and eventual yield will be dependent upon the typically fickle condominium market. Although it is possible to generate some revenue from renting one’s unit, often the ability to rent luxury units is limited and complicated due to the restrictions on short-term rentals put in place by the condominium’s governing board or the municipality in which the condominium is located. It is more often the case that the revenue from rentals is just barely enough to cover the expenses of condominium ownership, such as the ever-increasing condominium association fees. Additionally, the constant construction of “newer and better” condominium projects makes it increasingly difficult to sell a unit that may only be a few years old. Savvy foreign investors who recognize the limitations of the condominium market are looking to make bigger profits on their long-term investments and are gravitating toward commercial real estate. Although often not as glamorous as a luxury condominium, commercial real estate can be a more stable, lucrative long-term investment vehicle that can produce wealth and income for generations to come.
According to Real Capital Analytics, commercial real estate purchases by foreign investors took a turn up from $468 million in 2014 to $2.3 billion.
In 2014, condominium purchase prices skyrocketed, which, coupled with a foreign currency market that was in flux, left investors looking for a way to diversify their real estate investments. Many recognized the increasing demand for commercial space and commercial real estate was becoming a more attractive and viable investment. In 2016, most foreign investors can readily identify the advantages of acquiring and owning commercial space.
Advantages to owning commercial real estate.
1. Triple net leases– In a triple net scenario, the tenant is responsible for paying the property taxes, the building insurance, utilities and the cost of repairs during the term of the lease. This type of lease is attractive for resale because a buyer can count on a certain income stream for the lease term Buildings occupied by triple-net tenants are long- term assets that can be used to as collateral to finance other projects and acquisitions.
2. Long-term financial return on the investment– Commercial real estate typically yields a greater long-term financial return through a combination of the appreciation of the value of the real estate (equity growth) and the steady stream of revenue generated by rental receipts. Additionally, commercial leases often have a mechanism to increase the rent to counter the effects of inflation, so the income stream is consistent.
3. Financing is more accessible to foreigners– Foreigners can build equity and leverage commercial properties to finance expansion of existing projects or fund acquisition of new space
4. Predictable cash flow– With predictable cash flow, and a strong U.S. economy, it’s easy for foreigners to see the benefit of commercial real estate ownership.
5. Higher appreciation potential– Investors see U.S. real estate as a safe place to park capital with strong potential for equity growth. Often foreign nationals consider U.S. real estate a safer place to keep their money than the banks in their home country.
6. No HOA (Homeowner association fees)– Condominiums have monthly and quarterly fees, which they charge owners as part of the maintenance and upkeep of common areas and building structure. Commercial properties don’t typically have such fees.
7. Single-tenant lease– One lessee (a single individual or company) occupies the entire stand-alone building. It prevents vacancies as in a multi-office building space. There is less of a financial risk because you are dealing with one entity, not multiple companies. In addition, provisions can be written for a multiyear lease, which can be paired with a triple net lease. This will guarantee a long-term tenant.
With the myriad commercial spaces available in Miami such as office, multifamily, retail, mixed-use, and industrial, it has become increasingly appealing prudent to diversify one’s real estate investments beyond residential properties. If you structure your commercial acquisition properly, it can become a very profitable, long-term asset.
For further information on the various types of real estate investments available, please contact Barbosa Legal to discuss your specific goals so we can assist you in formulating a strategy to create a diversified and profitable real estate portfolio.