Why Investors Love Commercial Real Estate

Investors buy commercial real estate for rental cash flow from office, retail, multifamily and warehouse leases, a depreciation write-off on a 39-year schedule, appreciation and diversification, and because an illiquid asset does not swing with the daily stock market. Brokers and property managers let the owner hold it passively.

Commercial real estate is property utilized for business purposes. It is the go-to investment vehicle for affluent investors because of its compelling potential for almost guaranteed long-term cash flow.

As reported on Investopedia, commercial real estate (CRE) investments raked in returns averaging 10.3% in Q1 of 2021. They performed better than the stock market, which only garnered 9.6% on average.

Although commercial real estate returns fell close to 57% in 2020, it’s still a lucrative venture. Compared to other forms of investments, CRE commands higher returns while enjoying a long and predictable return on investment (ROI).

This piece examines the love story between affluent investors and commercial real estate.

Why do the Wealthy Love Commercial Real Estate?

What do rich people invest in? Andrew Carnegie, the industrialist billionaire, once said 90% of all millionaires acquired their wealth through real estate investments. While that is not accurate strictly speaking, it does paint a picture of real estate’s popularity.

The most beloved, of course, is the commercial real estate industry, as it allows the wealthy to make money without direct involvement. Here are some of the other incentives of commercial real estate investments:

1. Not easily prone to irrational market movements

Investments in CRE are safe from a fluctuating stock market because they are not liquid investments. As an affluent investor, you have confidence that the investment will maintain its value despite short-term market fluctuations.

2. Cash flow for reinvesting

Rents generated from multifamily, office, retail, and warehouse leases give the prosperous investor a reliable source of cash flow. An added advantage is the investor will eventually break even and acquire multiple real estate investments from the proceeds.

3. Tax benefits

The government assumes that a building will depreciate over time, whether it does or not. It allocates a useful lifespan of 39 years, so you can write off 1/39 of the property every year.

That means you get to pay less tax from the rental income every year until the 39 years are up. For an investor, a penny saved is as valuable as one earned.

You can take unlimited and legal real estate paper loss against your income. This enables you to preserve your income, hence growing wealth in commercial real estate.

4. Appreciation 

If you maintain the CRE property well and its surroundings are developing, CRE increases in value. Appreciation attracts affluent investors because the property attracts a premium during its sale, beating inflation.

Source: RCA CPPI Index

5. It is a long-term investment

An affluent investor wants to grow the investment and eventually enjoy reliable and sustainable returns without the headache of operational management. Premises to live and work are a necessity; therefore, CRE will always be marketable.

CRE requires patience, but is a better long-term investment compared to speculative assets like stocks that can go south with short-term market swings.

6. CRE allows diversified investment

You can invest in varying locations to insulate your income as the various assets face varying market risks. The best way is to invest offshore in other lucrative real estate markets, like China, Sweden, and Turkey. Diversifying mitigates risk and makes income even more reliable.

How do you choose a commercial real estate property to invest in?

Before selecting a commercial property, you should identify market demand, plan finances, and look into the feasibility of the investment in relation to your desired goals.

One of the perks of CRE is you can reap the benefits passively, as you can appoint real estate brokers, attorneys, contractors, and property management companies to manage the property.

That way, you get to enjoy the cash flow, appreciation, and tax benefits without breaking a sweat.

1. Underwriting

Any affluent investor should have a back-of-the-napkin formula to determine if an investment is worth underwriting.

The procedure can be a single metric, such as comparing the asking price per square foot with market rents per square foot. Whether it works for you or not gives you a quick green light or red light regarding the investment.

2. Financial planning

Identifying funding options for CRE investments is vital when selecting CRE properties. You need to review liquidity and set aside capital for expenses after an initial investment.

3. Market Demand

Consult expert brokers to help identify market and current trends, select ideal locations to set up properties, and achieve your financial goals.

What are the main commercial real estate investment strategies?

1. BRRRR

The BRRRR model involves buying property below market price, rehabilitating, renting, refinancing, and repeating.

2. Land banking

In this strategy, you identify development paths, buy large tracts of land, and anticipate that the land will appreciate with time.

3. Development

To develop a commercial property, buy raw land, then plan what to construct to capitalize on the property’s location to bring in the most money.

4. Fix and Flip

Like the residential concept, you buy a property below the market rate, upgrade or make necessary repairs, and place the commercial real estate for sale.

5. Wholesaling

A wholesale commercial real estate investor finds a good deal, puts the property under a contract, then sells the contract to an owner-occupant or another real estate investor.

6. Owner-occupied

Comparable to house hacking in residential real estate, you purchase a CRE, occupy part of it to run your business, then lease the rest of the space to other companies.

Conclusion

Wealthy investors love purchasing commercial real estate property because it is a solid yet passive investment vehicle. It also offers enticing tax benefits, does not bend to market fluctuations, and will likely keep appreciating in the long run.

Frequently asked questions

Is it worth it to invest in commercial real estate?

For the investors this article describes, the draw is a combination: rent from office, retail, multifamily and warehouse leases; a depreciation write-off spread over a 39-year schedule; appreciation when the property is well kept and its surroundings develop; and an illiquid asset that does not swing with the daily stock market. Whether it fits you depends on market demand, your financing and how the deal measures against your goals.

What creates 90% of millionaires?

The line usually credited to Andrew Carnegie is that 90% of millionaires built their wealth through real estate. This article says outright that the figure is not strictly accurate. What it does show is how popular real estate is with the wealthy, and commercial real estate in particular, because it lets an owner make money without being directly involved in running the property.

Can you invest in commercial real estate passively?

Yes. An owner can appoint real estate brokers, attorneys, contractors and property management companies to run the property and still collect the cash flow, appreciation and tax benefits. That hands-off structure is a large part of why affluent investors favor commercial real estate. Passive does not mean careless: underwriting, financial planning and a read on market demand still come before any purchase.

How does depreciation lower taxes on commercial property?

The government assumes a commercial building loses value over a 39-year useful life, whether it actually does or not. That lets the owner write off 1/39 of the property each year, so less of the rental income is taxed until the 39 years are up. For an investor, a dollar kept out of taxes is as valuable as a dollar earned, and that paper loss helps preserve income.

Start looking for new commercial office space at least 12 months before your lease expires. Site visits, due diligence and drafting, revising and finalizing the lease take roughly 4 to 12 months, and sometimes as long as 24.

Looking for new commercial office space is stressful as it is near impossible to find a space that matches your current office configurations. What’s more, you have to go through lengthy lease agreements, evaluate different properties, implement due diligence checklists, and so much more.

The good thing about the whole experience is that you will probably get the best deal if you’re willing to do the legwork. Whatever the outcome, this article examines the optimal time to start the search for a new commercial office space.

How long does it take to lease a new commercial office space?

One common mistake tenants make is asking commercial real estate agents to search for office space on short notice. Whereas it may work in some instances, it is not desirable.

A lot goes into searching for a commercial office space. For instance, it can take:

• 1-2 weeks to draft a lease agreement,
• 2-5 days to make necessary changes and
• 3-4 weeks to finalize it.

And that does not factor in site visits and due diligence checklists. Roughly, it will take you 4-12 months to get your desired office space. At times, it takes up to 24 months. So if you want to relocate, start no later than four months before you plan to move.

What are the signs it is time to look for new office space?

1. The Expiration Date of Your Lease Term

Every lease term has an end, typically stated in your lease agreement. If your lease term expires in the next 12 months, it’s probably time to start looking for a new space. 

2. Expanding or Downsizing Your Business

Your business might be doing well, and you are looking forward to adding new members to your team. As a result, you will need to open a new branch or relocate to a bigger space.

On the other hand, your business might be incurring losses, or you have too much space and don’t see how the business will utilize it in the future. The most sensible move is to cut down costs by relocating to smaller office space in such cases.

3. Inevitable change

Change is part and parcel of human and business dynamics. Some changes may come from external or personal factors. Some of the reasons that can force you to start looking for new commercial office space include:

• Spotted a better option
• Wanting a change of environment
• Relocating with your family
• Inability to pay hiked rent and other expenses

Before you make any decision, check the ancillary terms in your lease agreement on how you can terminate your lease prematurely. If you fail to do so, you risk getting fined.

What affects how long it takes to find new office space?

Finding a suitable commercial office space takes time and dedication. As noted earlier, it takes 4-12 months to find a new place to relocate. The duration it will take you to find a new office depends on:

1. Location

Searching for new office space in the same building will make a move easier and take a shorter time to execute. You can start looking at moving to this new space within a short period.

After all, you are already familiar with the property, the owner, and the nature of the lease agreements. This option is favorable if your only reason for looking for new office space is to accommodate new members joining your team.

However, this is no guarantee unless you have prior information from the property manager.

On the other hand, it might take longer if you plan to relocate to a new office space in a different building, area, or state.

2. Your Team

Hunting for new commercial office space is no walk in the park. It will take you longer to find one if you handle the task single-handedly than having reliable individuals to help you out.

It would help if you got in touch with a commercial real estate broker or agent. With experienced personnel at your disposal, chances are you will find a suitable office space in a shorter period.

3. Laws and Policies

Every locality has laws and policies concerning real estate properties, which may differ from state to state.

It may take you a shorter time to relocate to a new office space in the same area because you are familiar with the laws. Some states have stringent rules and regulations, imposing a range of requirements that you may not meet in a short time.

In this case, liaise with a commercial real estate law firm and agent in that state to help familiarize yourself with the laws and process any documentation.

4. Number of Available Properties

At times, you already know what you want or have many options you want to consider.

If you have a particular property in mind and it is vacant, you will likely relocate from your current premises sooner. However, when you have a long list of properties lined up for your consideration, it will take you longer to:

• Compare lease agreements
• Cross-check due diligence checklists
• Pay a visit to the properties

5. Financial Ability

As you would expect, your budget will probably determine how soon you should start looking for a new commercial office space.

If you have no issue paying above market rent for a commercial space, you will probably get space faster as there are few takers for spaces that are not worth the asking price.

If you are looking for a reasonably priced spot or better, your search will be longer as the competition is higher and no one wants to let go of a good deal. The recommendation would be to start searching as early as two years before the planned move.

6. Timeline and Demand

Note that your relocation timing and the market timing may vary. What time you choose to occupy the new space may not match the vacancy and occupancy period.

Similarly, if there is high demand in the area you want to settle, you will have limited options. Therefore, discuss with your agent to identify the most convenient period to look for a space in the area of interest.

Bottom Line

While there is stability in staying in your familiar comfort zone, some circumstances will force you to reconsider moving to a new commercial office space.

For instance, your lease may be coming to an end, you’ve employed a new team as the business is expanding rapidly, or you want a change in scenery. An unfavorable new lease agreement may also compel you to look for a new space.

Remember that getting a suitable commercial office space to meet your needs can take 4-12 months or even more.

Frequently asked questions

What are the common mistakes in office leasing?

The most common one is asking a commercial real estate agent to find space on short notice. Drafting, revising and finalizing a lease alone takes weeks, and site visits and due diligence push the full search to 4 to 12 months. The second is deciding to move before checking the ancillary terms that govern ending your current lease early, which can leave you facing a fine.

Should you use a broker to find office space?

Yes. Searching on your own takes longer than working with reliable people who know the market. A commercial real estate broker or agent shortens the search and can help you pick the most convenient time to look in a high-demand area. If you are moving to another state, pair the agent with a local commercial real estate law firm to handle unfamiliar laws and documentation.

Can you break an office lease early to move?

Only on the terms your lease allows. Before you commit to a move, read the ancillary terms in your current lease that explain how you can terminate it before it ends; skipping that step risks a fine. Moving within the same building is often the simplest route, since you already know the property, the owner and the lease terms, but confirm available space with the property manager first.

Large multifamily investing means buying apartment properties to lease, wholesale or flip. Before buying, evaluate your capital, skills, experience and risk tolerance, find your competitive advantage, set clear goals, then screen each property against investment criteria that start with location.

If you’ve never considered multifamily property investment, now is the time. Although there are several real estate channels you can choose to grow your investment portfolio, multifamily is among the best. It doesn’t matter whether you are interested in leasing, wholesaling, or flipping multifamily property–one of the benefits of multifamily investing is that you can reap handsome returns from the venture. You can expect an average annual return of up to 9%. As a new investor, you may not have the confidence or knowledge on multifamily property investment. This short guide provides the basics of what to know before buying a multifamily property and the steps you should take when evaluating a potential investment.

What should you consider before investing in multifamily property?

1. Self-Evaluation

This is the first step to take before investing. So, how do you analyze real estate multifamily investing? It involves looking at your strengths, weaknesses, and goals and choosing properties best suited to those factors. These factors may vary, but the basics include access to capital, skillset, experience, and knowledge, where you live, personal preferences, and risk tolerance. The same process is necessary if you are investing with partners. You will need to assess the strengths and weaknesses of the team. This step ensures that you invest in properties suitable for all the partners and not just one. For example, you may want to invest in property in a particular geographical area. After scrutinizing the area, you’ll be able to determine the amount investors are paying for units in the area. Then, you’ll have to gauge the expected returns and see if it tallies with the expectations of each investor. In addition, the number of units you get for the amount of capital each partner pays should also meet their expectations.  With self-evaluation, there are no set rules on carrying this task out. Be objective with how you view personal strengths and weaknesses.

2. Competitive advantages

The multifamily industry is highly competitive, and the competition only gets stiffer the greater the number of units you aim for. Use the earlier personal assessment to determine your competitive advantage over other investors. What is it that you’re uniquely good at? Or is there something you are willing to do that other investors won’t? What unique factors can you introduce to give you an advantage over other investors? Scrutinize your answers to this and compare them with your assessment. Try to find the sweet spot that balances your strengths and the unique advantage over competitors.

Photo by Sangga Rima Roman Selia on Unsplash

Say, for example, that your biggest weakness is no capital and limited experience. Your strength is determination and a willingness to learn. Instead of aiming for larger projects that may require more capital and expertise, you can choose to start on smaller projects within the local market. Pick a distressed property if you have the skills or grit for it. These types of properties may fall within your financial budget, seeing as the owners of such properties tend to be more open when it comes to striking a deal. On the other hand, you have an investor who has more than enough capital but with little time on their hands. They can search for stable multifamily properties managed by a third party and employ turnkey investment strategies. While the returns on such properties are lower, this investment strategy is more stable. Because of the hands-off approach, such an investor can even take up properties that are halfway across the country. Between the distressed property and the turnkey strategies sits another investment strategy called value-add. Value-add is a property that needs repairs or remodeling to reach its full potential.

3. Goals and Vision

When investing in multifamily property, it is vital to have specific goals and a clearly defined vision. If you haven’t, do so, and if they’re outdated, update them, as you will need to know the target. Growing your investments requires a mindset shift. The type of multifamily properties you purchase and their success depends on whether the investment criteria align with your vision and goals. After looking at self-evaluation, competitive advantages, and your goals and visions, it is time to look at the investment criteria.

What criteria should you use to choose a multifamily property?

1. Location

The geographical location is the first and most important factor when choosing multifamily property investment criteria. Most of the markets are either extensive or narrow. You have the option of selecting from a specific region or state, cities, or even neighborhoods within particular cities. Significant markets are known as primary markets, while smaller ones are secondary markets. Multifamily properties in primary markets cost more than their counterparts in secondary markets. When selecting a market, some factors investors need to look at include:

• Proximity to your primary residence: It’s easier to monitor projects closer to home.
• Population: rural areas have lower prices and less competition. Urban areas have better jobs, and lenders and investors prefer the latter. Some lenders even have a minimum population threshold.
• Crime: some cities have higher crime rates than others, affecting a property’s ability to appreciate over time. Although crime is present almost everywhere, choose relatively safer neighborhoods.
• Job growth: high job creation and low unemployment rates spur economic growth by creating opportunities. Job growth leads to an increased demand for units, including multifamily properties.

• Other factors: such as housing market, demographic, valuation levels, supply, landlord-tenant laws, and proximity to retailers. Even though it seems overwhelming, most investors pick only a few of these factors.

2. Property

There are several factors to consider regarding the type of multifamily property you want to invest in, including:

• Type: these multifamily types include high-rise, mid-rise, walk-up, garden-style, student housing, and subsidized housing.
• Class: the classifications for these multifamily properties depend on overall condition. The highest quality starts at A, and the lowest is class D.
• Age: some investors tend to look for properties that fall within a specific year range from completion of construction.
• Price: as you define the criteria, you’ll need to determine your price range, depending on your access to funding.
• Size: the number of units you invest in depends on the price per unit and the target price range.
• Occupancy: some investors don’t shy away from taking properties with low occupancy. The only challenge with this is lending restrictions and limited cash flow.

Final words

The criteria mentioned above are not final. It is common for investors to set their criteria based on priorities and opinions. The information aims at guiding new investors on the steps to buying a multifamily property while building their investment portfolio. The most basic criteria every budding investor should familiarize themselves with include how to gauge the value of the property using location, age, and crime statistics.

Frequently asked questions

Is multifamily a good investment?

This guide ranks multifamily among the best real estate channels for growing a portfolio, whether you plan to lease, wholesale or flip. Whether it is a good investment for you comes down to fit: your access to capital, your skills and experience, where you live and how much risk you can carry. A property that matches your goals and your investment criteria is a different investment from one that does not.

What are the risks of owning a multifamily property?

Competition comes first, and it gets stiffer the more units you chase. Crime in a neighborhood can hold back a property’s appreciation. Low occupancy brings lending restrictions and limited cash flow. Distressed properties take skill and grit to turn around, and value-add properties need repairs or remodeling before they reach their potential. Turnkey properties run by a third party are more stable, but their returns are lower.

How do you choose a market for multifamily investing?

Location is the first and most important criterion. Decide how wide your market is: a region or state, a city, or neighborhoods within a city. Primary markets cost more than secondary ones. Then weigh proximity to your home, population (rural areas mean lower prices and less competition, while lenders and investors prefer urban ones), crime and job growth. Most investors focus on only a few of these factors.

How do you analyze a multifamily investment?

Start with yourself, not the property. List your access to capital, skills, experience and knowledge, where you live, your preferences and your risk tolerance; with partners, assess the whole team. Then find your competitive advantage, set specific goals, and screen each property by location, type, class (A through D), age, price, size and occupancy. The criteria are not final; investors set them by their own priorities.

A commercial lease agreement is the binding contract that sets the rent, term, permitted use and obligations between a landlord and a business tenant. A well-drafted one names the parties, the premises, the rent, the lease term and the property use, and spells out fees, remedies, ancillary costs, rights and insurance.

When buying or renting a commercial property, you will sign several documents, chief among them the commercial lease agreement. The agreement legally compels concerned parties to fulfill certain obligations and protects their interests over the rented space.

Further, commercial lease agreements indicate the rights granted to tenants by the owners. Whereas verbal and written leases are legally binding, it is safer to use lease agreements considering the number of convoluted laws governing the landlord-tenant relationship. You want a document explicitly spelling out your wishes.

Ultimately, you should be in a position to understand what commercial lease agreements entail before signing one. Keep reading to find out what to include and expect in a commercial lease agreement.

What should a commercial lease agreement include?

A well-drafted commercial lease has five essential elements:

1. Parties of the Lease Agreement

You must note down the complete and correct names of the landlord and tenant. If you are signing on behalf of a business entity, indicate the company’s legal name to avoid liability if litigation arises.

2. The Premises

The lease must correctly identify the property. You must clarify the rentable and usable square feet area and write down the measured area.

3. The Rent

Renting commercial real estate may involve paying a base rent and additional monthly charges.

Therefore, the lease agreement must indicate how you will calculate the rent and the terms for paying the base rent.

4. The Lease Term

This is the period during which you will enforce the lease agreement. You have to note down the starting and closing date of the lease. In addition, you will address other details like due dates and bail-out options.

5. Property Usage

You must state the reasons for renting out a commercial property, including how the tenant will use the space. In short, the lease agreement should clearly define:

• The type of business conducted
• Products and services offered by the tenant
• Usage of the premises during the lease term

Failure to clearly define these elements may invalidate the lease, so address all these elements before signing a commercial lease agreement.

What should you look for before signing a commercial lease?

Before signing an agreement, there are standard clauses you must incorporate, including:

1. Hidden Fees

The most common fee you will notice in a lease is the rent. To detect any hidden charges, you will need to request a breakdown of the rent. With the help of a commercial real estate attorney, you can determine the fairness of the costs and negotiate accordingly.

2. Remedy Terms

Sometimes, unexpected events could lead to a breach or default. For instance, you may delay paying your rent, extend the lease period, or want to terminate your lease before the due date. Therefore, both parties need to agree on remedies for such eventualities.

3. Ancillary Terms

Apart from rent, there are other financial obligations that your lease agreement expects you to meet. These may include paying for repair and maintenance, security deposits, pass-throughs, rent hikes, and deductions on upgrades.

Pass-throughs are expenses that an owner should pay but chooses to transfer the burden to the tenant. If you do not scrutinize the fine print of these ancillary terms, you may get slapped with an unexpected bill.

4. Rights and Responsibilities

In lease agreements, there are clearly defined rights and responsibilities of the tenant and the landlord. They include restrictions, rules for using the leased space, and maintenance clauses.

Defying the laid down rules and restrictions may lead to hefty fines, arbitration, or litigation. It is crucial to read through them, seek clarity, and discuss them before signing the agreement with the lessor.

5. Insurance Clause

Renting commercial real estate has associated risks, such as canceled leases and business interruptions. The commercial lease agreements should specify the types of insurance taken out on the property.

Some of the insurance covers you need include leasehold insurance, rental interruptions insurance, and liability insurance. Ensure you capture this clause adequately in the agreement for clarity, so tag along an insurance broker to help negotiate with your landlord on the insurance terms.

How do you know if a commercial lease is a good deal?

As noted earlier, different leases will depend on the rent payment calculation. Before signing a commercial lease, analyze the rent and expected expenses.

There are tools, methods, and procedures you will use when gathering and organizing financial data for the analysis. To analyze the commercial lease agreement, you can use any of the following methods:

1. Take note of your gross income, which is the amount a property generates before expenses.
2. Determine the net operating income (NOI) the leased property generates, which is the revenue less operating expenses.
3. Divide the amount of cash you spend over the amount you receive to determine your cash-on-cash return.
4. Find out your cash flow by noting down the net amount you will retain after paying all expenses.

What makes a commercial lease invalid?

While commercial leases are legally binding, not all leases are valid. A void or invalid lease is an agreement that an interested party cannot enforce, which may happen if you ignore certain aspects of the contract. For instance, a commercial lease agreement is invalid if:

• You use the property to carry out illegal transactions
• A court of law deems one of the parties in the lease agreement as incompetent to sign a lease
• It is against a stipulated public policy such as not serving people of a certain ethnicity or religion
• One of the parties signed the lease under duress
• The lease is proven fraudulent
• The lessor is in illegal possession of the property
• It does not meet the requirements of a valid commercial lease agreement
• One of the parties breaches the contract

What are the types of commercial lease agreements?

Commercial lease agreements differ according to the rent calculation. There are four main types of lease agreements in commercial real estate:

1. Net Lease

This lease requires you to pay the rent and a portion of all fixed operating expenses. Net leases are either single, double, or triple.

2. Percentage Lease

You pay a base rent and a percentage from earned revenue.

3. Variable Lease

A variable lease agreement allows the tenant to pay a specified rent on a predetermined basis.

4. Gross Lease

Also known as the full-service lease, this lease has a fixed monthly payment. In this case, the landlord handles all other expenses. However, its base rent is relatively higher than the net lease. 

Bottom Line

A lot goes into crafting a commercial lease agreement. Knowing what to look for in a commercial lease will help resolve issues and avoid arbitrary decisions from either party. 

In case you are unsure of whether to sign up for a lease or not, you can seek help from appraisers, insurance agents, real estate agents, or legal experts. They will dissect the contract and help you decide whether it is favorable or not.

Frequently asked questions

Can you walk away from a commercial lease?

Only on the terms the lease itself allows. The lease term section should set the start and closing dates, the due dates and any bail-out options, and the remedy terms should say what happens if you want to end the lease before its due date. If those clauses are missing or vague, you have little to stand on. Read them, and have a commercial real estate attorney review them, before you sign.

What happens if you can’t pay rent on a commercial lease?

Late or missed rent is a breach or default under the lease. What follows depends on the remedy terms both parties agreed to before signing, which is why those terms belong in the contract from day one. Defying the lease’s rules and restrictions can also lead to hefty fines, arbitration or litigation. Negotiate the remedies up front, while you still have leverage.

What are the main types of commercial leases?

Commercial leases differ by how the rent is calculated. The four main types are the net lease (rent plus a portion of fixed operating expenses, in single, double or triple form), the percentage lease (base rent plus a percentage of earned revenue), the variable lease, and the gross or full-service lease, where one fixed monthly payment covers it, the landlord handles the other expenses, and the base rent runs higher.

Can you write your own commercial lease agreement?

Verbal and written leases are both legally binding, but landlord-tenant law is convoluted, so a written agreement that spells out exactly what each side wants is the safer choice. It must clearly name the parties, the premises, the rent, the lease term and the property use, or it may be invalid. Before signing, have appraisers, insurance agents, real estate agents or legal experts dissect it.

Yes, office buildings can be converted to residential use, and owners are doing it more often as demand for office space falls. The best candidates have small floor plates, large windows, high ceilings, open floor space and a central location near transit, schools and hospitals.

Over the past few decades, advancements in technology have changed how people work and live. With the dwindling demand for offices, you might have wondered: can you convert office areas to residential? Turns out you can.

Repurposing office space to residential property isn’t something new. As CNBC reports, 41% of apartment conversions were from non-residential buildings in 2020 to 2021 alone, primarily fueled by the pandemic.

Since there’s a push toward hybrid working models where employees spend several days working from home, it seems the trend is here to stay.

This article examines what makes an office ideal for the transformation to residential space and the history of the office block conversions.

How Did Office to Residential Conversion start?

The office building to apartment conversion is not some well-kept secret; real estate investors have conducted them for some time now. For instance, people have lived in loft buildings for decades in New York City.

However, it wasn’t always this way. In the 19th century, these lofts functioned as warehouses and manufacturing spaces before people turned them into offices. 

This transformation to residential living during the 20th century was one of the first examples of this kind of conversion. Well, at least in the United States. 

John Cetra, one of the founders of interior and architecture design firm CetraRuddy, claims that loft buildings were ideal for office to residential conversions because they didn’t rely heavily on air conditioning.

That also means they had smaller floor plates than the office building structures before them. 

The office to residential conversion movement started in the early 1990s, primarily isolated and limited to capital cities.

For example, in Paris, France, almost 600,000 square meters of office space have already been transformed into residential space since 2001. 

This translates to the creation of about 450 to 550 homes annually. However, this pales in comparison to Paris’ roughly 1.4 million square meters of housing space and 16.9 million square meters of office space. 

More recently, the pandemic continues to challenge the purpose of office spaces. The fact that people can work remotely or from home means that offices are no longer the only places where workers can conduct day-to-day work activities. 

With the declining demand for office spaces, building owners are now starting to look for alternatives more than ever before, hence the sharp increase in office to residential conversions. 

What Makes an Office Ideal for Residential Conversion?

There are a few things that make office spaces perfect for residential conversion, including:

1. Small Floor Plates

The loft buildings in New York were easy to convert to residential properties because of their small floor plates. Small floor plates meant that the space wouldn’t need to rely on air conditioning heavily.

Moreover, they were suitable for natural ventilation and allowed a ton of light. 

2. High Glazing-to-Opaque Ratios 

Office spaces usually have high glazing-to-opaque ratios, meaning huge windows that allow plenty of light. This is an ideal feature seeing how natural light is a priority for most renters and homeowners. 

Also, most office spaces have much higher ceilings than what you’ll find in residential properties. These high ceilings can offer great space, especially after taking out the acoustic ceilings. 

3. Unbeatable Location

Most office spaces are in the dead center of capital or major cities, typically in and around the central business district. Having a home in this area means having easy access to the best recreational activities and transportation. 

Being in a central location also means hospitals, financial institutions, and good schools are only a few blocks away. 

4. Distinctiveness 

A huge reason why certain office spaces make great residential conversions is their cool factor, which makes them distinctive. Office to residential conversions give you the chance to use the building’s eccentricities to create interesting types of spaces. 

It also allows you to take advantage of the peculiarities outside. 

5. Efficient Security

Most office spaces have efficient security protocols to keep company property and data safe. This is something residential areas can take advantage of as well. 

This factor is even more beneficial if the conversion targets wealthy individuals with valuable household possessions. 

6. Open Spaces

Most modern-day office buildings or setups have a lot of open space. You can do many things with that open space when converting the premises into residential spaces. It gives you room to play around with the overall design. 

For instance, open-kitchen designs are still prevalent in the real estate market. An open space makes developing such a layout pain-free. 

7. Connectivity

There aren’t many modern-day offices that can operate at optimal levels without an internet connection.

When you’re converting an office into a home, you’re most likely getting a place that has excellent connectivity options baked into the design. 

And with the flexible work-from-home movement gaining an upper hand, homes with excellent connectivity have become a highly sought-after commodity.   

8. Plenty of Electrical Outlets 

Office spaces typically have numerous electrical outlets. The abundance of electrical outlets can be beneficial to residential spaces as well.

We live in an era chock full of gadgets and weak batteries that need a charge frequently, or require full-time connection to an AC outlet. 

What are the challenges of converting an office to residential?

One of the most significant challenges when converting an office into a home is dealing with deep floor plates.

The deeper areas of the office that can’t access enough air or natural light can prove unusable in a residential setup. This factor typically negatively affects the viability of that residential conversion. 

You can overcome this issue if you intend to make large residential units. However, efficiency might be a problem if your units are on the smaller end of the spectrum. 

Conclusion

Seeing the numerous unoccupied office spaces around, you must have asked: can I change commercial property to residential? Yes, you can.

While it’s still too soon to tell what the future holds for this type of conversion, the global pandemic has helped boost its popularity.

That said, local municipalities will play a massive role in the growth rate of these types of conversions if they keep issuing permits for them.

If you’re considering converting your office into a home, make sure to examine the zoning requirements first before anything else. These rules and regulations will tell you whether you’re allowed to conduct such a conversion project.

Frequently asked questions

Are office to residential conversions booming?

Conversions have grown sharply. CNBC reported that 41% of apartment conversions in 2020 to 2021 came from non-residential buildings, driven mainly by the pandemic. With hybrid work keeping employees home several days a week and demand for office space falling, building owners are looking for alternatives more than ever, and the trend looks set to stay.

Can I change my property from commercial to residential?

Yes, you can. Start by examining the zoning requirements before anything else, because those rules decide whether you are allowed to do the conversion at all. Local municipalities play a big role here: the growth of these projects depends on whether they keep issuing permits for them.

Is it easy to convert an office building to residential?

It depends on the building. Offices with small floor plates, large windows, high ceilings and open floor space convert well. Deep floor plates are the biggest challenge, because the inner areas cannot get enough air or natural light and may be unusable as homes. Large residential units can work around that, but small units may not be efficient.

For many would-be first-time buyers, renting has replaced owning the dream home: construction costs, rising prices, a shortage of starter homes and investors paying cash have pushed buying out of reach. Renting also skips the mortgage, HOA fees and upkeep that come with owning.

Editor’s note, August 2026. This piece was published in September 2024 and describes the market as it stood then. Where it stands now, from Federal Reserve data: the median U.S. home sale price is $410,700 (Q2 2026), below the $442,600 peak of Q4 2022; the federal funds rate is 3.63%, down from a 5.33% peak in August 2023; the 30-year fixed mortgage averages 6.66%, down from 7.79% in October 2023; and consumer prices are rising 3.3% year over year. Sources: FRED series MSPUS, FEDFUNDS, MORTGAGE30US and CPIAUCSL.

As the pandemic set in, it triggered a year-long housing boom in the United States. Most would-be first-time homebuyers expected to purchase their dream homes. A year later, a housing crisis is looming as acquiring a home increasingly becomes unachievable. This article examines why most people are choosing the next best thing: renting.

Why is buying a home out of reach for so many first-time buyers?

An increase in construction costs, rising cost of housing, shortage of starter homes, changes in consumer desires, and competition from investors have caused a decline in the acquisition of residences.  The average price of a home in 2021 was $408,800, according to Statista. This is up from $389,400 in 2020, out of reach for most new homebuyers. Investors are outbidding individual homebuyers by buying homes in cash and in large volumes, so there is an acute shortage and an affordable housing crisis. Starters are facing the choice to go for fixer-uppers within their budget or rent better houses. For most, renting seems a more sensible option.

What does it cost to rent a home?

A) Application Fee

While house hunting, you pay a fee to view living spaces and apply to live in the selected space. This can range from $20 to $75 per adult, which the property owner can sometimes use to conduct a background check. It is best to narrow down your choices to avoid spending too much on application fees.

B) Movers’ Fee

To move your belongings from one home to the other will require hiring a mover. Your choice depends on the distance involved and your budget.

C) Security Deposit

As a tenant, you must pay a fee to assure your landlord that you will cover wear and tear as you leave the premises. This fee can be between 1-3 months’ rent. Sometimes, a bad credit rating will cause the landlord to demand a larger security deposit to cover the risk.

D) Garage Rental

Some homes have garage space or storage that requires you to top up the rent to access the additional area.

E) Renters Insurance

You pay for renters insurance to protect your belongings against flood, fire, and natural disasters. How much or how frequently you pay is dependent on the insurance company and their billing plan.

F) Pet fees

If you have pets, landlords who accept them on their property will consider them as additional liability. You might need to make a pet deposit. Depending on the landlord, it can be refundable or non-refundable, while some will charge you monthly rent for the pets.

What does it cost to own a home?

A) Mortgage

A mortgage is a secured loan for a property. You are to make predetermined monthly payments, along with taxes and home insurance. While mortgage and interest payments are constant, insurance and taxes can fluctuate.

B) Homeowners Association (HOA) Fee

This fee, paid to the HOA, maintains the neighborhood around your home. The HOA also comes up with regulations that you must follow.

C) Repairing Historic Registry Homes

If you buy a home under the Historic Registry, you must maintain its historic appearance. For repairs or adjustments, you must write an application and get approval from the Historic Registry.

D) Upkeep of the Home

As a homeowner, you periodically repair and maintain the roof, HVAC system, electrical systems, and general plumbing.

E) Utility Bills

Before moving in, you have to ask the previous owner for a history of their utility bills, as you will be liable for any amount due now that the property is in your name. A review of the account will help you plan for any unforeseen costs.

Is it better to rent or buy a house?

It is desirable to own a home because you end up with a long-term asset when you acquire a home. However, property prices have gone so far through the roof that it’s only logical to rent a space.

A) To Avoid Extra Costs

As a tenant, the only financial commitment you make is a security deposit. On the other hand, you have to commit a hefty down payment as a home buyer, typically 6% of the loan value. Moreover, the charges that come along with mortgage payments are, in most cases, higher than rent for the same property. Renting seems the easier option when you are on a tight budget.

B) Lack of Options

Housing prices have been increasing, worsened by the 1.8 million housing shortage. If you can only afford to own a home in a low-cost area in the suburbs, choosing to rent in a vibrant neighborhood at a lower cost makes more sense.

C) Renting as a lifestyle

Renting a house comes with freedom and convenience. Suppose you work in a profession where you must move periodically, as many doctors do. In that case, renting can be a convenient choice as you won’t have to stick to your home locale.

D) Convenience

Saving up for a down payment can take a while, so renting seems more affordable than buying. Then you’ll be stuck with mortgage repayments, which drag on for 10 years or more. Leasing allows you to invest the extra money in other projects. What’s more, renting makes it affordable to live in a place you can’t afford to buy, which is a dream come true.

Conclusion

Owning a dream home is a desirable long-term goal, but the prohibitive housing prices make the goal unattainable for most people. In such a scenario, renting looks like a more feasible idea, but there’s one issue: can you rent an apartment forever? Sure you can. And as more people are finding out, it makes more financial sense than buying a home. Prices did not keep soaring unchecked: the median U.S. home sale price peaked at $442,600 in Q4 2022 and was $410,700 in Q2 2026. Affordability is still the constraint, though, because mortgage rates near 6.7% cost far more per month than the same price did in 2021 — so the army of forever renters is being built by financing costs rather than by prices alone.

Frequently asked questions

Is renting really throwing money away?

Not by this article’s math. Owning does leave you with a long-term asset, but a buyer has to commit a hefty down payment, and the charges that come with mortgage payments are often higher than the rent for the same property. A renter’s main upfront commitment is a security deposit, which frees the extra money to invest in other projects.

What upfront costs come with renting?

Expect an application fee of about $20 to $75 per adult for each place you apply, which the owner may use for a background check. A security deposit usually runs one to three months’ rent, and more with a poor credit rating. Add the cost of movers, plus any pet deposit, garage or storage fee, and renters insurance.

When does renting make more sense than buying?

Renting suits people on a tight budget, people who cannot yet save a down payment, and people whose work makes them move often, such as doctors. It also lets you live in a vibrant neighborhood you could not afford to buy in, instead of owning in a lower-cost suburb, and it skips the HOA fees, repairs and upkeep that owners pay.

Can you rent a home forever?

Yes. As more people are finding out, renting long term can make more financial sense than buying. Home prices have come down from their Q4 2022 peak, but mortgage rates near 6.7% still make owning cost far more per month than the same price did in 2021, so financing costs are what keep many people renting.

A tenant improvement project, also called a leasehold improvement, modifies commercial space to meet a tenant’s needs, from ceilings and lighting to walls and floors. To get one right: plan the budget and timeline, stay flexible, manage expectations, put function over looks, think like the tenant, and choose a strong local design and construction firm.

Competition is cutthroat in the real estate market. Clients’ tastes constantly evolve as they want better design and features for their spaces.

As a real estate owner, you cannot allow your building to lag behind as you risk high tenant turnover in such a competitive market. The only way to stay in tenants’ good books is to engage in good old renovation projects.

Commercial contractors work with real estate owners to renovate or remodel commercial properties to suit tenants’ needs. This article looks at what a tenant improvement project is, what you need to remember while undertaking such a project and how to choose the right design partner.

What is a Tenant Improvement Project?

Also known as leasehold improvements, these are modifications made to commercial property to meet tenants’ requirements. Some of these modifications include ceilings, lighting, walls, and floors.

If you are undertaking a tenant improvement project, here are some tips to guarantee its success:

1. Plan

You must plan the entire project before starting. A tenant improvement project is expensive, and any misstep could prove costly. In short, always keep the following in mind:

• Budget – do not commence a project which will cost more than you can afford.
• Timeline – even if money is not an issue, will the contractor complete the project within your timeline to avoid income losses?
• Potential restrictions – although some properties may seem physically appealing, there may be legal restrictions on remodeling or improvements to said properties. You don’t want to buy expensive material only for the authorities to block the renovations.

2. Be Flexible

You want to work with the property and not against it. Instead of trying to tear down or completely remodel certain features, you should consider working around them instead.

For example, if the new restaurant has a unique ceiling, do not destroy that. Instead, work with that aspect and improve on it. Add attention-grabbing chandeliers or special lighting features to complement the ceiling.

Another example is a potential dentist’s office with great natural lighting. Think of exposed beams or fancy woodwork to catch that light. It is worth remembering that natural lighting significantly impacts people by boosting moods and health.

The right tenant improvement contractor will anticipate costs for the project and advise you on flexible alternatives to ensure the project stays within budget.

3. Manage Expectations

To keep the project on budget and on schedule, you’ll have to manage expectations. You may need to adjust your needs and wants. In short, separate the needs from the wants.

Start with what is non-negotiable for the project, and then finish with things that you’d like to include but are not strictly necessary. Do not make a mistake and become attached to a feature that is merely on your ‘want’ list.

4. Always Choose Function over Aesthetic

There’s nothing wrong with wanting the space to look aesthetically pleasing, but do not sacrifice function at the altar of looks. You want a space that meets tenants’ needs. There is no point in blowing a budget over fancy looks while completely ignoring the functionality of the space. Some factors you’ll need to keep in mind include:

• ADA Compliance – does the space meet the requirements of the Americans with Disabilities Act? By law, you must ensure the space is compliant and accessible for people with disabilities.
• Fire alarms and sprinkler systems – the space must be up to code for local fire alarm and suppression system requirements.
• HVAC – consider whether the space you’re improving will be expensive to heat or cool. On the flip side, consider whether it will suffer from poor cooling and heating.

5. Keep the Customer or Clients’ Perspective in Mind

As you undertake the tenant improvement project, remember that the tenants will utilize the building, not you. That means always having the actual tenants’ needs in mind, so think from their perspective. It’s also essential to involve the actual tenants to learn what they want in their space.

You can also check out local businesses to see what they did with their buildings. If possible, carry out surveys on customers to see what they’d want in the space.

6. How do you choose a tenant improvement contractor?

Lastly, you want to ensure you pick the right design partner to help with the project. Hiring a great design and construction partner positively impacts the outcome of the tenant improvement project. Consider the factors below when hiring the best team for the project:

A) A Positive Attitude

You want to choose a contractor with a positive can-do attitude. The right contractor believes that every problem is solvable with a blend of creativity, innovation, and expertise. Persistence is a crucial factor you should consider in a contractor.

When evaluating a contractor for the job, ask them how they’ve tackled specific challenges they’ve met in the past. Also, ask them for details on tackling your project. They must be willing to talk you through your vision, adding valuable input where necessary.

B) A Communicative Team

Tenant improvement projects tend to be demanding. Each passing day that the building lacks occupancy is a loss in profit for the owner, not to mention the project’s cost itself. You want to choose a design team with good communication to relieve that.

The contractor will need to apprise you at every step of the project. If there are any hiccups, the team must communicate in good time and present alternatives to any challenges they may encounter.

The contractor needs to practice prompt and open communication at every project stage. Also, always ask a potential contractor for client references. You want to hire a contractor who’s genuine and willing to share references from past clients.

C) Experience and size of the project

Ideally, most contractors may do a decent job of improving a simple tenant project. However, it would help to choose only the most qualified before assigning the tenant improvement construction contract. It is not uncommon for a seemingly simple construction job to develop complications along the way that leave most contractors floundering.

Go for a team that has the most experience dealing with multiple types of construction projects. There are high chances that they’ve encountered a wide range of issues in those projects and know how to handle any challenges that may arise in your project.

D) Budget

It may seem obvious, but you want to choose a design partner that falls within your budget. Even though the actual project may already cost an arm and a leg, do not choose the cheapest contractors you find as they may prove costly in the long run.

Ensure you select a team that offers the best value for money and with a proven track record of completed projects.

Conclusion

If you intend to keep your commercial building relevant in the real estate market, you may have to undertake a tenant improvement project in due course. These are modifications meant to transform a worn-down or dated building and upgrade it to attract better clients.

To conduct a successful tenant improvement project, you need to pick the right contractor, plan the entire project before commencing, and be flexible in your requirements. Keeping the tenant’s needs in mind or choosing functionality over looks doesn’t hurt.

Frequently asked questions

What are some examples of tenant improvements?

Common tenant improvements change ceilings, lighting, walls and floors. A new restaurant might keep a unique ceiling and add chandeliers or special lighting to show it off. A dentist’s office with good natural light might add exposed beams or fine woodwork to catch it. Other work brings the space up to code, such as ADA accessibility, fire alarms and sprinklers, and heating and cooling.

Why do building owners take on tenant improvement projects?

Competition in real estate is cutthroat, and tenants keep wanting better design and features. An owner whose building falls behind risks high tenant turnover, and every day a space sits empty is lost profit. A tenant improvement project upgrades a worn or dated space so it attracts better clients and keeps the building relevant in the market.

What rules does a tenant improvement project have to meet?

By law, the space must comply with the Americans with Disabilities Act so people with disabilities can use it. It must also meet local codes for fire alarms and fire suppression systems. Before buying any materials, check for legal restrictions on remodeling the property, because the authorities can block renovations that break them.

Section 8 multifamily owners are paid most of the rent by the government: HUD covers, on average, 70% of a Section 8 tenant’s rent and utilities, paid monthly to the landlord even in a recession. The tradeoff is a landlord application that can take up to 5 months, with paperwork and a property inspection.

The Section 8 Housing Program offers financial assistance to access low-cost housing, sometimes referred to as the housing choice voucher program.

According to the latest figures, about 2.2 million low-income households receive subsidized rent through the section 8 housing choice voucher program.

Since the government takes care of a large chunk of rent payment, the section 8 multifamily subsidized housing program has a massive advantage over traditional rental contracts. We examine how a shrewd property owner can tap into the program and build wealth.

What is the Section 8 Program?

Under the program, the government pays a percentage of the tenant’s rent directly to the Section 8 landlord whose property is in the listing.

The U.S. Department of Housing and Urban Development (HUD) funds the program by paying, on average, 70% of a section 8 tenant’s rent and utility bills.

A family must typically earn under 50% of the median income in a given area to qualify for HUD Section 8 relief.

How does Section 8 multifamily ownership work?

Homeownership and maintenance under the program can involve financial support from the HUD. The owners can also access conditional government subsidies when renovating, building new homes, or putting up properties for a mortgage.

The homeowner must set aside units to house the low-income American population under the section 8 housing list.

The Section 8 landlord application can be lengthy and costly, involving a lot of paperwork, a waiting period, and property inspection. It can take up to 5 months to get approval.

Multifamily homes are properties with up to 4 units, and still qualify as a single residence under lending standards. These can be townhouses, duplexes, triplexes, or apartments with up to four units.  Five units and above are multifamily, but usually require a commercial mortgage.

Most multifamily dwelling property owners rent them out to residents. They are great for generating a higher monthly rental income with lower maintenance costs, so you can rely on property to build wealth over time.

What types of Section 8 vouchers are there?

Section 8 includes two types of vouchers for tenants: the Housing Choice Voucher Program and the Project-Based Voucher.

The Housing Choice Voucher program allows tenants to choose any unit within the section 8 program. 

The Project-Based Voucher ensures that the federal rental assistance stays within the selected housing unit and is often more profitable for the owner.

Does Section 8 help landlords?

1. Easy Bank Financing

For real estate investors with a record of handling rental assets, the bank can use the projected rental income from the units to finance down payment programs for multifamily homeownership.

2. Certainty of Rental Income

Upon qualifying for the Section 8 program, the HUD agrees with the property owner on the expected rental income, per the Fair Market Rent. The landlord will receive monthly payments from the government, even when there’s a recession.

3. Occasionally Higher Rental Rates

As an incentive, the government often includes an annual 5 to 8% incremental increase on rent payments. The rate could translate to a better deal than what they would get from the open market.

4. Increased Occupancy Rate

Qualified, listed multifamily property owners get access to a vast pool of would-be tenants on the waiting list. The list can have 2 million or more Americans at any given time. That means minimal vacancy issues, reducing your marketing budget significantly.

5. Stability of Rental Income

The federal subsidies make multifamily homes in the Section 8 program suitable for long-term tenancy, as the tenants are likely to stay longer in the units. 

Video: https://www.youtube.com/watch?v=DAz4DPsq9Rc

How do you build wealth with Section 8 multifamily property?

Investing in several multifamily homes is a remarkable way to achieve long-term cumulative wealth. Here are some tips to consider when investing in section 8 multifamily homeownership:

1. Choose and manage tenants wisely

While renting out the multifamily units under Section 8, you pay off your mortgage from the tenants’ rent. Hence, liabilities go down, while in almost every instance, the property’s value goes up.

In this case, there comes a time when the mortgage is zero, and the income is primarily profit. Therefore, you can obtain more multifamily property, which you can scale to millions of dollars in wealth.

2. Ready Investors

The multifamily concept is more investor friendly as compared to single-family units. In this case, when you need financing, you bring the deal to the table while investors bring the money on board. Later, the profits get split as agreed.

3. House ‘hacking’

When you own a multifamily home, you can live in one of the units while renting out the rest. The tenants’ rent caters to your housing expenses, and you can save up over time.

4. Add more rooms

A sure-fire way to increase your rental income is to follow the BRRRR (buy, renovate, rent, refinance, repeat) strategy. Additionally, it would be best if you thought about increasing the number of rooms.

There’s a healthy market for multifamily homes with more than four bedrooms, but a chronic shortage of them, according to the U.S. Department of Housing and Urban Development’s Multifamily Properties: Opting In, Opting Out and Remaining Affordable.

For example, a single home will make you $150 in profit per month, but a duplex will rake in $300, while a four-unit multifamily will fetch $600 within the same timeframe.

Bottom Line

Scaling up wealth from multifamily units has a longer time horizon, is not entirely problem-free but is assured, especially when listed in the Section 8 program, whereby there is the assurance of monthly government payments.

It gets better over time as you can hire property managers to run it on your behalf, and you can adjust rental prices upwards after periodic renovations.

Frequently asked questions

How much of the rent does Section 8 pay?

On average, HUD pays 70% of a Section 8 tenant’s rent and utility bills. The payment goes directly to the landlord every month, and it keeps coming even in a recession. HUD and the owner agree on the expected rent based on the Fair Market Rent, and the government often adds an annual increase of 5 to 8% as an incentive.

How do you become a Section 8 landlord?

You apply to list your property in the program. The landlord application involves a lot of paperwork, a waiting period and a property inspection, and approval can take up to 5 months. Once listed, you set aside units for low-income tenants from the Section 8 housing list, and you gain access to a waiting list that can hold 2 million or more Americans.

What are the downsides of being a Section 8 landlord?

The application is lengthy and can be costly, with paperwork, a waiting period and an inspection that can stretch approval to 5 months. You must set aside units for low-income tenants on the Section 8 list. Building wealth this way also takes a longer time horizon, and it is not problem-free, even though the monthly government payments make the income more certain.

Who qualifies for Section 8 housing?

A family typically has to earn under 50% of the median income in its area to qualify for HUD Section 8 help. About 2.2 million low-income households receive subsidized rent through the housing choice voucher program. Tenants with a Housing Choice Voucher can choose any unit in the program, while a Project-Based Voucher keeps the rental assistance with one specific unit.

Retirement savings research shows around half of the US population is facing a retirement crisis. They have little incentive to adopt workplace retirement plans, thereby skipping retirement savings to attend to urgent needs.

According to the National Institute on Retirement Security, middle-class households have restricted financial reserves, placing them squarely in the firing range of retirement uncertainty. The study examined financial assets by generation, wealth, and race.

The study found that middle-class millennials only own 14% of the total assets held by their generation. But, the other generations fared worse. For instance, middle-class baby boomers and Gen Xers only own single-digit percentages of the total wealth held by their collective generations.

In the absence of strong public policies, the already numerous ranks of financially insecure will expand further. This article examines and tries to find solutions to retirement insecurity among the middle-class population in America.

What policies would help the middle class retire securely?

Automatic payroll deductions: one way to help the middle class achieve retirement security is to automate the retirement savings process. The workers’ savings program should enroll everyone into the system unless they opt out.

Moreover, the Social Security Administration (SSA) should deduct retirement savings alongside taxes, and employers should match contributions.

Lower the cost of entry: many employers don’t offer 401(k) plans because of the high turnover of workers and administration costs associated with providing such a plan.

A congressional policy should streamline the costs to ensure a cost-effective program for both business owners and employees.  

Even if Congress does not do so, individual states can grab the mantle and offer such incentives to stimulate retirement security.

Incentivize retirement savings: currently, the tax incentives for retirement savings favor higher-bracket taxpayers and higher-income individuals. Congress should bring to parity those earning smaller incomes or paying lower income tax rates and lower incentives to higher earners to recover the deficit.

This ensures more people in lower-income and middle-class households enroll in retirement savings programs.

Working longer: according to the SSA, the full retirement age varies from 65-67 years. One surefire way to ensure people beat retirement insecurity is by allowing them to work past retirement age.

Sure, most senior citizens won’t work for much longer past that, but it reduces the number of years before they start collecting social benefits. In addition, they don’t have to spread their retirement savings over an extended period, and they get to save and earn for much longer.

Improve Medicare: Americans pay a lot in healthcare compared to citizens in other countries. Since the elderly experience many age-related health issues, these can wipe out their retirement savings since Medicare does not cover all health care costs.

What’s more, the extra premiums, copayments, and coinsurance keep fluctuating over the years. These out-of-pocket medical expenses are a great contributor to retirement insecurity among the middle class.

Video: https://www.youtube.com/watch?v=zCOXWAI8EC0

Make lifetime income accessible: this refers to annuities where you can buy your pension in return for a lifetime guarantee of monthly income.

401(k) plans don’t currently offer the option partly because of high entry fees for individuals, which takes it out of the reach of most middle-class people. In any case, most of the annuities programs on the market are just tax deferral conduits for rich people.

Plans should be underway to introduce deferred income annuity, a sort of insurance for outliving your retirement savings, helping alleviate retirement insecurity.

How do you plan for retirement?

1. Understanding your planning horizon

The foundation for a sound retirement strategy is your current and retirement age, as the further your retirement date is, the better your risk portfolio. Your holdings should focus on revenue and conservation of capital as you become older.

2. Establish spending needs after retirement

Having an estimate of your expenses in retirement helps in the planning process as more spending will require additional savings. Update the retirement plan once a year to keep track of your savings.

3. Calculate the rate of investment returns after tax

Your retirement savings will get taxed, but that depends on the retirement account you hold. Calculate the rate of return after tax to assess the feasibility of an income-generating portfolio. As you age, the return threshold goes down as you tend to engage in low-risk investments.

4. Assess investment goals against risk tolerance

Ensure you are comfortable with risks taken in your portfolio. How much risk can you take to accomplish your objectives? You can do that by determining what’s necessary and separating it from luxury.

5. Stay in control of estate planning

Estate planning involves the planning, management, and disposal of your estate. Having life insurance is an integral part of an estate plan and planning process.

Why is retirement planning important?

1. Peace of mind

Planning for retirement not only reduces stress during retirement but also during your working years. Uncertainty due to lack of planning can lead to stress.

2. Power of compounding interest

The earlier you start saving for retirement, the more you will accumulate through compound interest. Your investments accumulate interest, which adds to your capital. 

3. Tax gains

You can deduct your monthly contribution toward pensionable plans from taxable income, reducing your taxes. Some retirement plans are either tax-free or partially taxable.

4. Preparation for unforeseen expenses

Sadly, old age comes with health complications, and medical bills can eat into your savings. You are better off budgeting for such eventualities when you’re still young and healthy.

Bottom line

The American middle class does not have the financial reserves to cater to their needs after retirement. A retirement plan including a 401(k) plan that caters to medical, everyday needs, and emergencies is crucial to minimizing retirement insecurity.

Frequently asked questions

Is America facing a retirement crisis?

Yes. Retirement savings research shows that around half of the US population faces a retirement crisis. Many workers have little incentive to join workplace retirement plans, so they skip saving to cover urgent needs. Middle-class households hold limited financial reserves: middle-class millennials own only 14% of their generation’s total assets, and middle-class baby boomers and Gen Xers own single-digit shares of theirs.

Why don’t more employers offer a 401(k)?

Many employers skip 401(k) plans because of high worker turnover and the administration costs of running a plan. That leaves many middle-class workers without an easy way to save at work. The fix this article calls for is a congressional policy that streamlines those costs so a plan is cost-effective for business owners and employees. If Congress does not act, individual states can offer the incentives.

Does working past retirement age help retirement security?

Yes. Social Security’s full retirement age runs from 65 to 67. Working past it cuts the number of years your savings have to cover, because you start collecting benefits later and do not have to spread your savings over as long a stretch. You also keep saving and earning for longer. Most people will not work much past that age, but the extra years still ease the pressure.

How do healthcare costs affect retirement savings?

Americans pay more for healthcare than people in other countries, and Medicare does not cover every cost. Age-related health problems, along with premiums, copayments and coinsurance that change from year to year, can wipe out retirement savings. That is why this article says to budget for medical bills while you are still young and healthy, inside a retirement plan that covers medical needs, everyday costs and emergencies.

You increase cash flow on an investment property by earning more or spending less: a larger down payment or a refinance to cut loan payments, upgrades, allowing pets, lower operating costs, an additional revenue stream, measured rent increases, more units, and paid parking and storage.

Owning an investment property can be a profitable and fulfilling endeavor. According to a 2020 MSCI review, the global real estate investment market was worth $10.5 trillion, proving the market is awash with cash.

As CNBC found, real estate is still the preferred investment vehicle for most of today’s millionaires. Here’s a quick look at how you can wring out more money from your investment property.

How do you increase cash flow on a rental property?

Although real estate investment has been with us for ages, the market keeps changing, so you have to keep innovating. For instance, you might have a profitable building that suddenly starts making losses due to shifting demand.

Here are a few strategies you should employ for the cash flow properties:

1. Make a Large Down Payment

Investment properties require a lot of money to acquire. If you pay through mortgage or loans, that translates to high monthly payments. Making a sizable down payment of at least 15-30% of the purchase price will reduce the amount borrowed and lower your interest rates and monthly repayments.

It will mean more money in your pocket at the end of the month. Additionally, a larger down payment will cut down on the loan repayment duration, ensuring you enjoy a loan-free investment much sooner.

2. Investment Property Refinance

Refinancing can help increase cash flow from your investment by changing the terms of your investment property. You can pay larger monthly installments to decrease your interest rate, ensuring you pay your loans faster.

Look for opportunities to refinance your property by regularly monitoring mortgage interest rates. You can identify when rates plummet, which is handy for renegotiating your interest rates and lowering your monthly mortgage repayments.

Lower rates will make the loan manageable, thus increasing your cash flow.

3. Upgrade the Property

Making upgrades to your property increases your property’s market value and improves goodwill with your tenants. One way to achieve that is by installing green appliances to help cut down on utility costs.

Some of the upgrading projects you can conduct include outdoor structures maintenance and changing hardwood for laminate floors. That maintains the same aesthetics but at a lower maintenance cost.

Improving the property allows you to raise the rent in the short term and make a bigger profit should you choose to sell it. Whatever you choose, it will mean an increase in your cash flow.

4. Allow Pets

Allowing pets can enlarge your tenant reach. That’s because pet owners tend to move less often as many properties do not allow pets. Therefore, permitting pets guarantees an increase in lease renewals, ensuring constant cash flow. 

Many tenants with pets are willing to pay an extra fee not to give up their pets. Consider charging pet deposits or pet rent in addition to the rent. You will make extra money, and in case of damages from pets, the money will cover the costs.

5. Lower Operating Costs 

It is essential to keep tabs on operating costs as they can eat into your cash flow if left unchecked. You can reduce these costs by setting up individual meters for each tenant, so they cater to their own bills.

If you pay your property’s utility costs, consider installing solar panels to cut down electricity costs. Similarly, introduce coin-operated washers and dryers in your rental units.

You can also choose to switch to service providers who have better rates than your current one. Conduct preventive maintenance to minimize repair costs. You could also consider running the show yourself to save on the property management fees and increase cash flow. 

6. Have an Additional Revenue Stream 

Depending on the location of your property, zoning laws could allow you to have a mixed-use property. Consider adding or mixing commercial and residential rentals in your property if this is the case. This way, you will get money from residential and commercial tenants. 

Using your property for advertising can be another income source. Lease some sides of the building or fence for advertising space.

Monetizing your spare room or land by renting it out to interested tenants for use at an extra cost, such as a flower garden, is another way to increase cash flow.

7. Increase rent

Raising your rent will ensure positive cash flow and help keep up with your expenses. A good guideline would be a 3-5% yearly increase on rent, depending on the market. A steeper increase could mean higher tenant turnover.

To minimize resistance, communicate the reasons necessitating the increase. Enlighten them on the neighboring market lease rates, rising expenses, or any improvements you have done or plan to do. Alert them via written notices of rent increase at least three months before the changes to allow them to prepare. 

8. Add more Units

With the skyrocketing real estate prices, this is an opportune time to look into adding accessory dwelling units to your property. If you own a property with a big unused yard, you can add a backyard home or install an attached additional unit to the existing property to rent out.

Alternatively, you can convert a basement or garage by insulating the walls and giving the area a cosmetic facelift by adding household appliances. Just like that, you get an additional unit to rent out.

9. Parking and Storage Space Provision

If your investment property is in an area with scarce parking spaces, consider offering this extra service. You can give your tenants the first opportunity, then rent out the remaining slots to neighboring tenants.

Convert an empty lot or unused basement in your commercial property into a paid parking spot to earn more money from your investment.

The self-storage industry is a $40 billion business, showing how lucrative these investment ventures can be. If you have a vacant floor, you can convert it into a rentable storage space for tenants or other interested parties.

Final Word – Increasing an Investment Property’s Cash Flow

Investing in property doesn’t have to be a stressful venture, as you can earn more from it than you imagined if you get creative. Firstly, you can increase cash flow by making a large initial deposit, which reduces the loan cost, monthly repayments, and loan duration.

Renegotiating your loan terms to reduce interest and monthly payments is another smart way to increase cash flow. Further, allowing pets, offering storage and parking spaces, and installing additional units are surefire ways to increase cash flow. 

Lastly, lowering overhead costs, raising rent, and giving your property a facelift are guaranteed to increase cash flow.

Frequently asked questions

How much should you raise rent on a rental property?

A common guideline is a 3-5% increase each year, depending on the market. A steeper jump can drive tenants out and raise turnover. Explain the reasons behind the increase, such as neighboring rents, rising expenses or improvements you have made, and give tenants written notice at least three months before the new rent takes effect.

Does a bigger down payment improve rental cash flow?

Yes. A down payment of at least 15-30% of the purchase price reduces the amount you borrow, lowers your interest rate and cuts the monthly payment, which leaves more money in your pocket at the end of each month. It also shortens the loan, so you own the property free and clear sooner.

Should landlords allow pets to increase cash flow?

Allowing pets widens your pool of tenants, and because many properties ban pets, pet owners tend to move less often and renew their leases. Many will pay extra to keep their animals, so you can charge a pet deposit or monthly pet rent on top of the rent, and that money also covers any damage the pets cause.

How can you lower operating costs on a rental property?

Put each unit on its own meter so tenants pay their own utilities, and if you pay the utilities, consider solar panels. Add coin-operated washers and dryers, switch to service providers with better rates, and keep up with preventive maintenance to hold down repair bills. Managing the property yourself also saves the management fee.

What extra income can a rental property earn besides rent?

Where zoning allows, mix commercial and residential tenants. Lease walls or fences as advertising space, rent out spare rooms or land, offer paid parking to tenants and neighbors in an empty lot or unused basement, and turn a vacant floor into rentable storage. An accessory dwelling unit, such as a backyard home or a converted garage, adds another rent check.