Why commercial real estate (CRE)? Why not CRE?
I will eliminate all investor excuses for not investing in CRE by laying out all the benefits they could be missing out on by not investing in CRE:
Multiple Streams of Income.
With stocks, you have one hope of making money – appreciation. You rely on your stocks’ prices going up to profit from the price spread of what you sell it for and what you bought it for. This appreciation isn’t guaranteed, as the performance of the average investor can attest. Over the past twenty years, the average retail investor has lost an average of 0.5 % when considering inflation.
With CRE, you have multiple sources of income. You can generate income from rents, from offering amenities and services, and from appreciation. Don’t get CRE appreciation confused with stock appreciation. Whereas stock appreciation is unpredictable, CRE appreciation is a proven commodity. There may be hiccups here and there, like during the early days of the Great Recession and the recent pandemic, but CRE is typically one of the first asset classes to rebound. Long-term, CRE has demonstrated steady and consistent growth.
CRE offers two types of leverage: human capital and financial capital. With stocks, many investors attempt to leverage the expertise of so-called experts, advisors, and brokers, but these professionals have consistently proven that the only people making money are them. 90% of professional managers fail to beat the market, so why would you want to leverage their “expertise.”
CRE, on the other hand, lends itself to human leverage. Passive private investments in CRE in the right hands promise higher returns than anything offered in the public markets. In the hands of experienced and knowledgeable experts not only mitigates risk but also improves your chances of receiving substantial returns on your investment.
CRE also offers financial leverage. By leveraging bank financing, CRE investors can multiply returns that stocks can’t offer.
Take a $100,000 investment in stocks vs. CRE, for example. If both assets appreciate 10% in one year, stocks will give you a return of $10,000. With CRE, if you take the $100,000 and use it as a down payment on a $400,000 property, your return after one year will be $40,000 compared with 10% for stocks. Even taking into account debt servicing at a very conservative 4% APR, that $1,600 in interest expense is a small dent in the $30,000 profit advantage of CRE over stocks.
Diversification with stocks only dilutes returns, and what happens when the whole stock market tanks? Diversification won’t save you.
Diversification with CRE serves a different purpose. Instead of diluting returns, CRE diversification protects them. Investors can protect cash flow by diversifying across asset classes and geographic locations and through passive investments across multiple funds. The other performing assets can compensate appreciation as short-term downturns in one asset in the portfolio.
Saving a dollar in taxes is just as good as making an extra buck. With CRE, you can have both. Not only does CRE offer above-market returns, but you can keep more of what you make through generous tax benefits.
These benefits include business deductions, regular depreciation, bonus depreciation, long-term capital gains treatment, avoidance of self-employment taxes like FICA, and tax deferral through 1031 exchanges.
Unlike stocks, CRE is a tangible asset that will never lose its entire value. It’s this tangibility that makes real estate a proven commodity.
Recession and Inflation Hedge.
Stocks go in the same direction as the broader economy and in the opposite direction of inflation. CRE insulates portfolios from downturns and inflation, and investing in the right CRE classes not only insulates returns from downturns, but the right assets thrive during recessions with income keeping pace in inflationary times where demand is not affected by rising prices.
It’s hard to bet against CRE with the multiple benefits it offers to investors. When compared to stocks, the choice is clear.
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.