For many investors, stocks, bonds and mutual funds comprise most, if not all of their portfolios as they strive to accumulate wealth and fulfill their retirement goals. In fact, anything other than these choices may be referred to as alternative investments, which consequently makes commercial real estate, according to those parameters, an alternative investment. The facts, however, belie that characterization. As an investment, real estate has been around far longer than paper assets. Plus, large institutional investors like pension funds and insurance companies have long recognized the upside of commercial real estate investing. No matter how it’s considered, it remains a dominant industry for several reasons.
Intrinsic value as a hard asset
Like oil, natural gas and gold, commercial real estate is a commodity of which there is a finite supply of in the world. The land has intrinsic value because it serves a basic need. The materials that are used to construct the buildings on the property are also commodities, although not finite. However, if the price of these materials rises, the cost to construct similar buildings will increase, thus making the existing property more valuable. This translates into commercial real estate being a good hedge against inflation. Unlike many other investments that drop in value when the cost of goods and services rise, commercial real estate values also tend to rise.
Yield is a means of predicting the future income on a property. It is calculated based on the property’s value, annual income, and running costs. Capital growth is not considered in determining yield. Commercial properties typically have considerably higher yields than residential properties.
Over time, the cash flow commercial real estate investments generate is exactly what investors are looking for. Of course, this is predicated on investing in the right properties that maintain high occupancy and consistent, predictable rent.
Diversification and non-correlated returns
Many speak of diversity in a stock/bond ratio or of investing in different segments of the stock market. Commercial real estate investing truly provides a different investment option that, importantly, is most often not tied to the performance of the equities market.
In real estate, leverage is most often associated with the ability to control 100% of an asset with an investment of a lesser amount, say 20%, with the balance financed. In commercial real estate, however, leverage can also mean when the interest the investor is paying is less than the investment’s return percentage. This underscores the importance of selecting the right investment that will perform well.
Among the tax advantages an investor can enjoy: interest expense is tax deductible, depreciation expense can offset tax liability, and many non-mortgage related expenses, such as upgrades, maintenance, and improvements may be tax deductible.
Commercial real estate can be a good investment even in uncertain market conditions. However, not all classes of commercial real estate are equal and not every property is a winner. Primior has the expertise and experience to understand the difference. Contact us today.