Top Reasons to Have Commercial Real Estate in your Portfolio Today
Morgan Stanley just predicted U.S. commercial real estate prices would be flat in 2016, as compared previous forecasts for 5% growth. That’s as the value of office buildings, and malls have shown rapid appreciation in recent years on the heels of higher investment demand for high-yielding commercial assets. Analysts are concerned that income generated from such properties won’t be enough moving forward to keep investors happy and help maintain returns, in an uncertain environment of slowing earnings, and potential recession, as noted by Bloomberg.
While I don’t subscribe to the fears of flat growth, I can tell you with certainty that commercial real estate rewards will continue to outweigh risks over the long-term… and should be an essential core of your portfolio…
That’s because of the following:
Sustainable cash flow
One of the biggest advantages to owing property is that tenants pay you rent.
You pull in monthly, and predictable cash flow from those property investments.
Oftentimes, cash flow is greater with commercial properties. Yields are higher per square foot in commercial buildings than with residential properties, as I highlight in my book, Winning with Commercial Real Estate.
Extraordinary Tax Benefits
With real estate, you can depreciate a commercial property’s value over a 39-year period and deduct it from taxes the same way you deduct expenses. Things such as depreciation and interest expenses can help shelter or defer taxes.
Interest is one of a landlord’s biggest expenses. Landlords can deduct mortgage interest payments on loans that are used to improve or buy rental properties as well as on credit cards used for rental activities, such as repairs.
Of course, consulting with a tax professional is best.
A Hedge Against Inflation
Commercial real estate also serves as a great hedge against inflation.
According to Martha S. Peyton, Ph.D., author of Is Commercial Real Estate an Inflation Hedge, such investments had the highest correlation to inflation when compared to other assets like the S&P 500 and corporate bonds.
And, according to TIAA-CREF, “If inflation emerges, investors in commercial real estate will likely withstand it according to the historical performance of the asset class. Over five-year holding periods historically, commercial real estate returns outpaced inflation nicely. Over short term periods, commercial real estate returns have been modestly correlated with inflation demonstrating their “inflation hedging” capacity.”
Leverage happens when a buyer is able to buy an asset using his or her own resources for a portion of the full purchase price, while the remainder of a purchase price is contributed by a lender.
As I noted in my book, “If you can finance 50 percent of the purchase price of a commercial property, you own substantially more real estate for fifty cents on the dollar. You use other people’s money to achieve appreciation and cash flow.”
If you leverage well, and properly you stand to become wealthy. Over-leverage, and you stand to lose just about everything. Be smart with your investment dollars.
Commercial real estate is hard asset with intrinsic value.
The land has value as does the building. If you choose your location and building wisely, an investor can benefit knowing they own an asset with a potential to generate income no matter what happens to tenants.
Overall, commercial real estate deserves a spot in smart investment portfolios. It’s how more than 45% of all millionaires in the U.S. made their money. With the leverage offered, the tax benefits, and the cash flow potential, it just makes sense…