Legacy Wealth Portfolio: Commercial Real Estate

Five years ago, my husband and I started a commercial real estate investment company. We specialize in owning and managing small retail strip malls and it did not take long to recognize the huge benefits of being a commercial real estate investor. I am sure many of you know people who are real estate investors, but how many commercial real estate investors do you know?

Small retail commercial strip mall owned by OH Charlie LLC

What is commercial real estate? Commercial real estate is commercial properties intended to generate a profit, either from capital or rental income. Commercial property includes office buildings, medical centers, hotels, malls, retail stores, multi-family buildings, farmland, warehouses, and garages. If you buy a single family home and rent it to someone for a profit, that is not a commercial real estate transaction. However, if you buy a four-unit retail stripmall and rent it to four business owners for a profit, you have now entered into the world of commercial real estate. That is exactly what I do as a commercial real estate investor and commercial real estate is the cornerstone of my legacy wealth portfolio.

As you build your legacy wealth portfolio, it is important to consider diversification. Diversification does not mean simply having a variety of stocks and mutual funds, but instead different asset classes: stocks/equities, fixed income, cash, real estate, and commodities. While the stock market continues to show significant volatility, and less risky asset classes such as treasuries offer little to no return on investment, commercial real estate continues to provide an excellent risk/reward profile to investors. Here are six unique reasons why investing in commercial real estate is an excellent choice for your legacy wealth portfolio.

  1. SUBSTANTIAL CURRENT INCOME AND SPENDABLE CASH. One of the biggest benefits to Commercial Real Estate Investments is that the assets are generally secured by leases which provide a regular income stream, significantly higher than typical stock dividend yields. 
  2. EXCELLENT APPRECIATION OF ASSET VALUE. Commercial Real Estate Investments have historically provided excellent appreciation in value that meet and exceed other investment types.  Properties generally can go up in value from internal factors such as proactive management – making cost-effective improvements to the property that improve the usability and desirability of the asset, and external factors such as supply and demand imbalances.
  3. ACCUMULATE SIGNIFICANT EQUITY THROUGH LEVERAGE. Another important characteristic of commercial real estate investing is the ability to place debt on the asset which is several times the original equity. This allows you to buy more assets with less money and significantly magnify your equity as the loans are paid down.
  4. PROVIDES A SUPERIOR HEDGE AGAINST INFLATION. According to a recent report by expert Martha S Peyton, Ph.D. and head of Global Real Estate Strategy for TIAA-CREF, commercial real estate investments had the highest correlation to inflation when compared to other asset classes such as the S&P 500, 10 year treasuries, and corporate bonds.  As the United States, Asia, and Europe continue to carry out policies to print more money to spur economic growth, it is important to recognize the benefits of owning commercial real estate as a hedge against inflation.  Generally speaking, when inflation occurs, the price of real estate, particularly commercial real estate, will also rise.
  5. UNIQUE SECURITY ADVANTAGE. Commercial Real Estate is one of the few investment classes that is a hard asset that has meaningful intrinsic value. The property’s land has value, as does the structure itself.  By choosing the location and asset quality wisely, investors can benefit from the security of knowing that they own an asset that has the potential to earn income regardless of what happens to the existing tenant(s). For this reason, commercial real estate investments do not fluctuate with the same volatility as the stock market.  
  6. TAX BENEFITS. The US Tax code benefits real estate owners in a number of ways.  Mortgage interest and depreciation deductions can shield a large portion of your income stream.   It is recommended that one consults his/her tax advisor to understand all of the benefits.

Now there are some disadvantages/barriers to becoming a commercial real estate investor. Commercial properties tend to cost significantly more than residential properties and financing for commercial properties typically require that you have existing experience/operations as a commercial real estate business/investor. These aren’t obstacles that can’t be overcome, but these are obstacles that can be significant if you don’t have the knowledge and a plan.

“I remember saying to my mentor, ‘If I had more money, I would have a better plan.’ He quickly responded, ‘I would suggest that if you had a better plan, you would have more money.’ You see, it’s not the amount that counts; it’s the plan that counts.” – Jim Rohn

This post follows a series on legacy wealth budget. One of the major pillar of a legacy wealth budget is investing. This blog is the first in a series of building a legacy wealth portfolio.

If you want more information on commercial real estate investing or need help with creating a legacy wealth budget for your household, please do not hesitate to contact me for help.

Charleese Hasan, PhD, The Budget Dr. OH Charlie LLC: ohcharlie2llc@gmail.com

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