How Your Investment Portfolio Could Benefit from Commercial Real Estate
When it comes to building a successful investment portfolio, there’s no one-size-fits-all strategy. However, conventional wisdom says your investments should include some mix of savings, stocks, bonds and real estate.
While savings is liquidity defined, poor interest rates (sub 1%, anyone?) make idle cash the antithesis of “investment.” Bonds, at a return of 2 – 3%, aren’t a whole lot better. Stocks can yield high returns, but carry potential market volatility and the gains can quickly turn to pain. Yet, despite providing potential lackluster returns, investment portfolios tend to be bond and stock heavy. What about the asset class: real estate? For many investors, even high net-worth individuals, real estate is often an underrepresented portfolio asset.
DIVERSITY THROUGH COMMERCIAL REAL ESTATE
Still, many do not question the value of real estate investments. This makes sense, given that investing in commercial real estate (CRE) in particular generally means:
Historically strong returns – Averaging an annual return of about 9.5%, over a 20-year time period commercial real estate has historically performed well.
Cash flow and current income – Rental income from stable commercial properties means a potential steady and predictable cash stream (translating into possible protection and diversification during financial market volatility).
Tax benefits – When properly structured, commercial real estate can offer investors an array of
tax benefits tied to depreciation, interest, etc.
Pride of owning a hard asset – Owning real estate has a special appeal over simply owning a
“value” of stock.
More control – Personal ownership affords more control over the investment, with some types
of real estate.
A hedge against inflation – A big potential plus for your portfolio, since real estate investments tend to benefit from inflation in the long term.
Positive leverage – Another commercial real estate opportunity that can potentially increase
ROI.
Diversification – Both through lack of direct correlation with the stock market AND through the
variety of commercial property types available for investing.
COMMERCIAL REAL ESTATE DEFINED
So, what exactly is “commercial property”? From an investor’s standpoint, it’s property that is meant to generate a profit, through capital gains or rental income. For real estate investment purposes, it can be helpful to categorize commercial real estate as follows:
Office property – Classified as Class A, B or C, depending on construction quality and location (A being best of both worlds), Central Business District (or “CBD,” which include downtown high rises in medium and larger cities) and suburban office buildings (campus-like office parks in the ‘burbs).
Industrial property – Includes heavy manufacturing, light assembly, flex warehouse (a mix of
industrial and office space) and bulk warehouse (e.g., distribution centers).
Retail property – Usually small (strip) to large (“power”) shopping centers, regional malls and
out parcels, which are parcels of land within a center that are leased to individual tenants, like banks or fast-food places.
Multifamily – Properties like suburban garden apartments, urban midrise apartments and professionally-managed high-rise apartments that are found in larger markets.
Hotels – Can range from full-service, big-name Five Stars to no-frills boutique properties to
extended stay hotels.
Self-Storage – A property with storage units or spaces that are rented to tenants, often on a
monthly basis.
As alluded to before, while there’s a potential upside to investing in commercial property, there’s typically a downside as well. Some risks center around these questions:
• How do I identify commercial properties that represent strong investment opportunities?
• How do I access and invest in them, when I don’t have connections?
• Don’t I need a lot of capital (that I don’t have) to invest?
• Won’t investing in commercial properties tie up that capital for a long time?
• How on earth do I manage properties once I invest in them?
• What if the economy tanks and businesses suffer—threatening my rental income?