Why Does Commercial Real Estate Belong In Your Portfolio?
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I first came across Alpha Investing by reading about the company on both Passive Income MD’s and Ms Bonnie, MD’s (now Wealthy Mom MD) sites.
I was intrigued and subsequently met with one of the principals, CEO Fark Tari, in person and had a great discussion about real estate.
Fark also gave a more formal presentation to a group of my colleagues from work and by the time it was over I felt comfortable enough to put some of my own money into play (a multifamily apartment complex, Modern On The Rail, in Phoenix, Arizona).
I also felt very comfortable about the company and its mission that I had no qualms about forming an affiliate relationship with Alpha.
Fark was kind enough to give the follow article to share on my platform.
[Disclaimer: As an affiliate of Alpha Investing, I do receive financial compensation if you sign up as a potential investor.]
Prudent investors understand that diversification is a cornerstone of financial stability in any portfolio.
There are many different ways to achieve this and one of the most prominent non-conventional options – conventional being stocks, bonds and cash – is the alternative asset class of commercial real estate.
Investors consider real estate because it offers both current income as well as long term wealth generation and because it is a proven inflation hedge.
But there are many reasons to include real estate in a portfolio and here are four of the top ones:
Institutional Portfolios Include Real Estate.
One of the most often cited reasons for investing in real estate is to mimic the investment strategies of the largest investors in the world, pension funds and endowments.
On average this vast institutional cadre invests 10% of their assets in real estate.
The average investor has only 3% of their portfolio in real estate.
This does improve when you consider high net worth investors who average an allocation of 12% of their portfolio in real estate.
The Yale endowment, considered one of the best managed funds in the investment universe, is targeting a 9.5% allocation of its entire portfolio to real estate in 2019.
Increased Return on Investment.
Commercial real estate has historically performed well relative to other investment options.
Since the year 2000, real estate returns have outperformed the S&P500 by an average of 2% per year.
Over the last 20 years, real estate has earned over 9% annual return on investment.
Coupled with these enhanced returns is another benefit, greater stability.
Whereas stocks and other tradable assets are subject to immediate divestment and are subject to the whims of the market, real property income streams are typically secured by long term lease contracts that provide stability and predictability.
Furthermore, real estate is inherently less liquid than stocks as it cannot be sold at a moment’s notice.
The illiquid nature of real estate serves to shield this asset from those volatile stock market swings and allows for more consistently sustainable value appreciation.
Real estate also beats out conventional investments because it provides both immediate cash flow as well as longer term wealth generation.
Current income streams come from excess cash flows generated by rents.
At the same time buildings increase in value over time as rents increase, giving another source for building wealth.
For many people looking to put their money into investments, tax issues are a major concern.
The good news is that commercial real estate offers a number of tax advantages over conventional investments.
For example, buildings begin to depreciate after acquisition, and the tax code permits for this depreciation to offset tax liabilities on profits.
In addition, renovations, repairs, and other associated expenses that come with keeping a commercial property well maintained can also be tax-deductible.
Under certain circumstances, capital gains tax obligations can be deferred indefinitely through “like kind” reinvestment in real estate through what are known as 1031 exchanges.
Recently, the passing of the 2017 Jobs and Tax Act provided for the establishment of Opportunity Zones where taxes due on capital gains can be substantially reduced or even completely forgiven.
This includes both long- and short-term capital gains, as well as capital gains accruing from any source – including even the sale of art, for example.
Due to the expense of buying a commercial property outright and decades long prohibition from general solicitation, which made commercial real estate investment the prerogative of only a small minority, investors often think that commercial real estate is out of reach.
With recent changes in regulations, however, specifically the 2012 JOBS Act, investors now have access to vetted, institutional caliber commercial real estate investment opportunities with small minimum investment thresholds.
These small minimums mean that real estate diversification is within the reach of everyday investors.
By not needing to invest a large proportion of one’s net worth in an individual transaction, investors can mitigate risk and enhance returns further by diversifying within the real estate asset class itself.
While all of these are good reasons for holding commercial real estate in a portfolio, recognizing that there is substantial risk investing in real estate is also important.
Unlike stocks and bonds, real estate investments are not yet covered by professional analysts.
Therefore examining the details and properly vetting by due diligence for a particular offering becomes the obligation of the investor or their advisor.
Finding a reliable, experienced management team to help curate transactions is a good start in the process of incorporating real estate into any portfolio.
If you are in search of financial help, please consider enlisting the service of any of the sponsors of this blog who I feel are part of the “good guys and gals of finance.”
Even a steadfast DIY’er can sometimes gain benefit from the occasional professional input.
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