We’re living in a digital age where everything is available on demand. Entertainment, news, shopping – it’s all at our fingertips and all available instantly 24-7.
What is becoming very clear is that what already short attention span the public had is now becoming even more succinct. And that this has permeated into every aspect of modern life, including investing.
Gone are the days of principled investing based on sound fundamentals with the patience to see a business plan through. Investors are constantly looking for a quick fix and the next best thing.
Wall Street is driven by this constant speculation fueled by herd mentality. This is due in no small part to the stock market’s liquidity. Acquiring and unloading stocks can now be done with a swipe of the phone.
Wall Street’s liquidity too often enables investors to act on their slightest impulses and to indulge irrational behavior. The result is extreme volatility in the markets where only a lucky few who are in the right place at the right time make money. The data backs this up.
According to JP Morgan Chase Asset Management, retail investors averaged a 2% annual return in the last 20 years. When taking into account inflation (2.43 over the previous 20 years), the average retail investor lost money.
The Wall Street overlords love this instant digital economy and the irrational behavior it encourages. The more tradespeople make the more money in their pockets.
But there is one group of investors who resist indulging in their impulses and invest in a way that curbs irrational behavior. This group is the ultra-wealthy – including institutional investors – who minimize their exposure to Wall Street volatility by investing in the long-term.
The ultra-wealthy love long-term investments like commercial real estate because investing in the long-term prevents them from making rash decisions and allows them to maximize their returns.
The ultra-wealthy know that in the long run, commercial real estate delivers some of the best risk-adjusted returns of any asset class.
Investing long-term allows the law of averages to play out. Being in an investment for too short a term can mean catching the brunt of a downturn without seeing the benefits of a rebound. The ultra-wealthy have always been attracted to long-term investments for the host of advantages quick fix stocks and speculative investments like cryptocurrency can’t provide.
Here are some of the reasons you should consider long-term investments like commercial real estate:
Consistent Cash Flow. Long-term investments in commercial real estate benefit from long-term leases with reliable tenants with the effect of generating constant, periodic cash flow essential for compounding wealth through reinvestment.
Investing for the long-term also allows value-add properties the time needed to stabilize before growing into steady cash cows. Investing in the right asset class like multifamily that is consistently in high demand will ensure consistently high occupancy rates – guaranteeing constant cash flow.
Liquid investments like stocks don’t provide this type of cash flow essential for building wealth.
Appreciation. Cash flow isn’t the only source of profits for investors. Like death and taxes, appreciation is a sure thing in commercial real estate in the long-term. Commercial real estate isn’t immune to periodic short-term retractions, but in the long-run, it can be counted on for healthy appreciation.
Investing for the long-term allows investors to maximize both cash flow and appreciation.
Tax Benefits. Besides cash flow and appreciation, the tax benefits of long-term commercial real estate investments will put more money in an investor’s pocket by saving them money in taxes through deductions and depreciation.
In addition to depreciation that can be exploited over long periods, expenses such as rental expenses and mortgage insurance are immediately deductible in the year they’re incurred. Tax reduction and tax deferral through long-term capital gains and 1031 exchanges are additional tax benefits from commercial real estate investing.
Low Risk. Despite periodic short-term downturns, overall, in the long run, commercial real estate is a relatively safe investment. With the right business plan and reliable management to execute the plan, commercial real estate takes care of the rest by providing consistent above-market returns uncorrelated to the broader markets.
Particular asset classes like multifamily that is in short supply will ensure high occupancy and consistent rents for years to come.
Liquidity prevents investors from achieving true wealth. By acting on their impulses and indulging in irrational behavior, investors deprive themselves of reaping the financial rewards of long-term investments like commercial real estate that require discipline.
Successful investors like the ultra-wealthy and institutions invest with a long time horizon. Illiquidity prevents them and anyone they partner with from cutting bait too soon before an investment can mature and come to maximize fruition.
The beauty of commercial real estate and something the ultra-wealthy have no qualms about where they lack the requisite experience or knowledge with a particular asset class or subsegment; there are always opportunities to defer to the expertise of others.
Opportunities in private investment funds afford investors the chance to invest in commercial real estate without the requisite knowledge of time commitment.
Moreover, private investment funds, unlike their public counterparts, are typically more transparent with management that is readily accessible to potential investors for vetting to allow these investors to align their investment goals with those of the decision-makers at these funds.
Many investors are interested in building multigenerational wealth. Those who have the required long view, patience, and ability to act quickly, will stand to benefit not only from the potential for higher returns in the form of cash flow and appreciation but also from the tax benefits of long-term investments like commercial real estate.
Investor, writer, speaker, and founder. Kyle Jones, key principal of TruePoint Capital, is accountable for investment decisions, asset management, and overseeing financial activities, operations, and investor relations. Kyle additionally is a Global Sales Leader for a large Fortune 100 technology company. Kyle received a Bachelor of Science degree from Texas State University – San Marcos.