5 Reasons Every Investor Should Have Commercial Real Estate in Their Portfolio
Current economic trends show investors are grasping for stability. After one of the most volatile periods in history, people are looking to allocate to secure long-term, reliable investments, such as real assets. Commercial real estate’s stable nature has always been one of its main attractions and, now more than ever, is drawing in investors.
However, stability is not the only advantage;
We have rounded up the top five reasons investors should add commercial real estate to their portfolio.
1) Tax Benefits
There are ways to efficiently optimize the tax benefits of investing in commercial real estate that may not be present with other types of investments. Investors are able to do this by implementing procedures such as a Cost Segregation analysis designed to take advantage of accelerated depreciation. By investing in a well-occupied property, the investor is set up with steady initial cash flow while the building itself captures bonus depreciation when a cost-segregation analysis is completed.
In addition, when the time comes to sell property, investors can defer taxes through a 1031 Exchange. Doing this allows investors to not only defer their current tax bill, but also gives the ability to reinvest the proceeds from the sale in other properties of like-kind and equal or greater value. This creates a great opportunity for an investor to increase their portfolio value while deferring the payment.
2) Higher Yields than Public Markets
Commercial real estate has historically provided yield-hungry investors an alternative investing vehicle that consistently delivers returns at a premium to bonds and other fixed income products. With the U.S. High Yield (Junk Bond) Index dipping below 4% for the first time in history, it is clear that investors are searching for real returns outside of US Treasuries and dividend paying stocks. Commercial real estate offers investors the opportunity to achieve consistent yields in the high single-digit and low double-digit range in addition to appreciation.
For example, we at Excelsior Capital provide our clients with real estate investments that target 8-12% cash on cash yield returns that we distribute monthly.
3) Ability to Lock in Long-Term Debt at Attractive Costs
With interest rates at an all-time low, borrowers can lock in long-term debt at low interest pricing with a fixed rate. This effectively lowers your cost of capital and enhances your returns. Prudent leverage is one of the more notable advantages of investing in commercial real estate, and provides for a better risk-adjusted return.
4) Physical Assets with Capital Preservation
One of the most compelling aspects of commercial real estate as an asset class is that it is a tangible investment. The value is determined by the quality of the building, the location, and the credit of the tenants in place – elements that are not typically volatile. Shares in publicly traded companies and bonds, on the other hand, can drastically change in value overnight due to a variety of micro and macroeconomic factors unrelated to the investments themselves. Lack of correlation to the volatility of the stock market is one of the hallmarks of commercial real estate and why investors rely on it as a means to preserve capital.
5) Labor and Material Costs Continuing to Rise with Inflationary Pressures on the Horizon
While inflation can hurt intangible investments and those subject to daily market fluctuations, it actually strengthens the commercial real estate asset class. It is an issue of timing. With costs of production on the rise, this creates limited supply of buildings at a relatively lower cost basis (when compared to expected costs for new building development). As a result, rental prices for existing properties will increase and generate higher net income. This is just the beginning; over time, the property value should increase and surpass inflation.
Commercial real estate properties are a hedge against inflation, making it a solid investment at this point in time, and for the coming cycle, given the amount of liquidity that is already in the system, with all signs pointing to more government spending in the future.
If you are interested in learning more or have any questions, please do not hesitate to contact us.
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