Do you currently have commercial real estate assets in your investment portfolio? While the stock market continues to show significant volatility, and less risky asset classes such as treasuries offer little to no return on investment, commercial real estate continues to provide an excellent risk/reward profile to investors.
One of the biggest benefits to Commercial Real Estate Investments is that the assets are generally secured by leases which provide a regular income stream, significantly higher than typical stock dividend yields. Click to see a comparison between stock dividends vs commercial real estate dividends (otherwise known as capitalization rates).
Commercial Real Estate Investments have historically provided excellent appreciation in value that meet and exceed other investment types. Properties generally can go up in value from internal factors such as proactive management - making cost-effective improvements to the property that improve the usability and desirability of the asset, and external factors such as supply and demand imbalances.
Another important characteristic of commercial real estate investing is the ability to place debt on the asset which is several times the original equity. This allows you to buy more assets with less money and significantly magnify your equity as the loans are paid down.
When investors place “positive leverage” on an asset, they effectively multiply their net spendable cash by borrowing money at a lower cost than their property returns back to them. A quick example: your friend loans you $10 and asks for $11 back, one dollar interest....you immediately loan that $10 to someone else and ask for $2 interest...paying back the $11 owed and making a profit with no additional investment...you just participated in positive leverage. This happens all the time in commercial real estate investments.
According to a recent report by expert Martha S Peyton, Ph.D. and head of Global Real Estate Strategy for TIAA-CREF, commercial real estate investments had the highest correlation to inflation when compared to other asset classes such as the S&P 500, 10 year treasuries, and corporate bonds. As the United States, Asia, and Europe continue to carry out policies to print more money to spur economic growth, it is important to recognize the benefits of owning commercial real estate as a hedge against inflation. Generally speaking, when inflation occurs, the price of real estate, particularly multi-tenant assets that have a high ratio of labor and replacement costs, will also rise.
Commercial Real Estate is one of the few investment classes that is a hard asset that has meaningful intrinsic value. The property’s land has value, as does the structure itself. By choosing the location and asset quality wisely, investors can benefit from the security of knowing that they own an asset that has the potential to earn income regardless of what happens to the existing tenant(s). For this reason, commercial real estate investments do not fluctuate with the same volatility as the stock market. Review this case study of a stock versus the value of its underlying real estate.
The US Tax code benefits real estate owners in a number of ways. Mortgage interest and depreciation deductions can shield a large portion of your income stream. It is recommended that one consults his/her tax advisor to understand all of the benefits.
Commercial Real Estate has a pride of ownership factor that is nearly impossible to value, but is one of the highest among all asset classes. There is great joy and pleasure in knowing you own an income producing property...a piece of the commerce and business activity that drives the economic engine of the nation.