The Top 7 Reasons to Invest Directly in Commercial Real Estate
Recent economic trends have investors searching for yield-generating opportunities as well as a means to further diversify their portfolios. Investing directly in commercial real estate is a way to achieve both goals, but it also provides a myriad of other benefits.
You can search the internet and find several long lists of reasons to invest in commercial real estate, but we have highlighted the seven reasons that we believe are especially compelling given the current economic climate.
1. Diversification
Commercial real estate investments have historically had a relatively low correlation with the stock market, which makes real estate a natural option for portfolio diversification. This low correlation is key as it protects your portfolio from significant loss due to a singular event. Additionally, in recessionary periods, stocks and bonds become increasingly correlated; holding investments in other asset classes helps increase your portfolio diversification in those times. While diversification does not guarantee there won’t be a loss, it is an important component to minimizing your total risk and achieving your long-term financial goals.
2. Income Stream
Investing in a stabilized real estate asset provides investors with steady, day-one rental income while also offering the potential for long-term capital appreciation. These rental income streams are commonly used to cover everyday living expenses for retirees or as supplemental income for those that have more volatile primary income streams. Others prefer to recycle the cash and invest it back into their portfolios. Because rental income is typically scheduled out in a lease, the cash flow generally has less volatility than other investment options.
3. Capital Preservation
Real assets such as office buildings have observable, tangible value. This value is determined primarily by the quality of the building, the location, and the credit of the tenants in place, and these factors are not volatile. Shares in a publicly traded company, on the other hand, can drastically change in value overnight due to a variety of micro and macroeconomic factors. That potential for volatility makes investments in real assets a much safer option for those whose primary concern is the preservation of capital.
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4. Inflation Hedge
Property values and rent levels have historically increased with inflation. Given that those two items are primary drivers of real estate returns, there’s a natural inflationary inflation hedge built into such investments. hedge built into almost any real estate investment.
5. Stronger Yield Potential
Investors searching for stable yield opportunities generally look to the bond market, which has generated an average return between 5% and 6% since 1926. In comparison, direct commercial real estate investments can achieve average yields as high as 13-14% while still providing many of the same benefits that bonds do.
6. Tax Advantages
Real estate has long been considered a tax-advantageous investment option. However, due to the recent Tax Cuts and Jobs Act, it has become more intriguing than ever before. If structured properly, investors can defer taxes on distributions and now also claim deductions such as enhanced bonus depreciation.
7. Potential for Capital Appreciation
The stock market is the most common place for investors to deploy their capital, largely due to the long-term growth prospects that stocks offer.?Commercial real estate investing, however, can offer similar growth potential (with a different set of underlying risk factors). For instance, by focusing on economic and demographic patterns, investors can acquire assets in locations that they believe will experience significant increases in demand or popularity, which drives up property values and leads to strong capital appreciation.
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