Billionaire Andrew Carnegie once famously said that 90% of millionaires got their wealth by investing in real estate. I’m not sure how accurate that 90% figure is, but there’s no doubt that real estate has created many millionaires and continues to attract investors seeking wealth.
Many real estate millionaires got into real estate because they were modeling others they saw making millions from this asset class.
The ultra-wealthy have long allocated more than 20% of their portfolios to commercial real estate (CRE) and favored CRE over stocks for CRE investments’ advantages.
According to at least one report, the ultra-wealthy prefer CRE over stocks, and the gap is widening. Take, for instance, the asset allocations of one such group of ultra-wealthy investors – TIGER 21.
TIGER 21 is a peer-to-peer investment network of ultra-high-net-worth investors (UHNWIs) – each with a minimum of $50M in investable assets. Each quarter, they publish an asset allocation report showing where their members place their money.
According to the latest report, CRE still outshines stocks:
Among the members of TIGER 21, CRE is on the uptick, and stocks are on the downswing – with stocks shedding the 1% gained by CRE in the current quarter.
Many of the members of TIGER 21 who got into real estate did so because they were modeling the investing habits of others, but there are particular reasons many of these individuals got interested in real estate and why other investors should seriously consider adding CRE to their portfolios.
Here are some of the reasons for investing in CRE:
Higher Returns at Less Risk.
CRE has outperformed the S&P 500 over 25 years but at reduced risk. Whereas stocks are highly liquid and subject to the whims of the market and extreme market volatility, CRE is illiquid, and its income streams are more stable because rents are often secured by long-term lease contracts that provide stability and predictability and can be adjusted to reflect inflation.
CRE’s illiquidity offers the added benefit of generating consistent and sustainable appreciation with long-term gains ironing out any short-term dips.
While stocks are one-dimensional in the way of returns – generated solely from unpredictable price appreciation, CRE offers multi-dimensional returns through current cash flow and long-term appreciation as the underlying asset increases in value over time.
Tax Benefits.
CRE offers several tax advantages that stocks do not offer. Depreciation is one of these advantages. The tax code permits building depreciation to defer immediate tax liabilities on profits. In addition, renovations, repairs, and other associated expenses involving upkeep can also be tax-deductible.
Accessibility.
Due to recent changes affecting securities regulations, passive investments in CRE are now more readily available to more investors than ever. Investors interested in investing in commercial-grade assets without the means to do it alone can now pool money with other investors through private investment or syndication led by seasoned experts to invest in commercial-grade assets without high capital or knowledge barriers.
Institutional Investors Favor CRE.
UHNWIs model successful institutional investors like pension funds and endowments that allocate at least 10% of their portfolios to real estate.
UHNWIs have been trending away from stocks and towards alternative assets like CRE for the past 10 to 15 years, with alternatives now occupying more than 50% of most UHNWI portfolios.
The benefits of CRE are undeniable, and it’s not surprising that so many millionaires were made from real estate and why more and more investors are gravitating towards it today in search of an alternative to volatile stocks.
Many millionaires who made their money from real estate got to where they were because they modeled someone else. Who are you modeling? Are you modeling a family member, friend, or colleague stuck in a middle-of-the-road job and relying on their 401(K) for their retirement? A 401(K) that will be inadequate to meet their needs at retirement based on the current average 401(K) balance of less than $100,000.
Maybe it’s time to start modeling UHNWIs who allocate a quarter of their portfolios to CRE and are already retired – many 10, 15, or 20 years ahead of schedule.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.
