Is commercial real estate (CRE) good for your portfolio? Should CRE be a crucial cog in your retirement plan?
The short answer is yes. The long answer is it also depends on other factors such as asset class, the marketplace, your chosen investment vehicle, and the experience and expertise of the managers of passive investment opportunities.
There’s a reason elite investors like the ultra-rich and institutional investors like Ivy League university endowments consistently allocate more than 25% of their portfolios to commercial real estate – mostly through passive investments.
It’s because the sum of all parts of passive CRE investments offer the best combination for building not only enough funds for retirement but for generational wealth.
Is all CRE created equal?
All CRE is not created equal and not all opportunities are created equal.
Why do elite investors prefer private markets over public markets?
Because public offerings like REITs are still joined at the hip with the overall market.
When the entire market loses 50% of its value like during the Financial Crisis of 2008 or a third of its value like earlier in March due to the COVID-19 pandemic, very few companies or industries are spared – public REITs.
Besides non-correlation to Wall Street, elite investors also prefer private markets for passive investment opportunities to invest in private CRE investment funds and syndications. It’s through passive investment opportunities that elite investors are able to not only generate income for their present needs but also build wealth for generations and charitable causes for generations to come.
HERE IS WHY PASSIVE CRE INVESTMENTS SHOULD BE PART OF YOUR PORTFOLIO
Transparency. Private investment funds and syndications are far more transparent than their public counterparts – readily opening up contact with management in order for investors to align their investment objectives with those of the company soliciting their investment capital.
By being able to question management regarding their track record, experience, background, market understanding, and financial projections, investors are able to separate seasoned pros from novices. This could be the difference between achieving your financial goals and losing your capital.
Key management is the single most important factor in determining your return on investment.
Passive Income. Passive income allows investors to make money in their sleep and potentially walk away from their day jobs if they so choose. By creating multiple streams of income, investors are able to compound returns to accelerate the process of building wealth exponentially.
Appreciation. CRE derives its value from the income it generates. Of course, the price of CRE naturally appreciates over time from appreciation, but its intrinsic value is why CRE appreciates more over time than other assets.
That’s because, in addition to inflationary growth, an asset like CRE with intrinsic value generates income from rents over-time and appreciates over time as rental rates grow from increased demand. This additional appreciation is valuable for augmenting the value of investment portfolios.
Diversification. CRE offers diversification beyond the diversification across multiple companies and industries practiced on Wall Street.
Passive CRE investing offers opportunities to diversify across a variety of factors including geographic markets, asset classes, property types, investment strategies, and compensation types. This type of diversification is an ideal hedge against downturns where income from certain performing investments can compensate for underperforming assets in a downturn.
Real estate is an essential asset – making it an ideal hedge against recessions. People don’t stop needing shelter or places to go to work.
Predictable Returns. Unlike Wall Street, CRE returns are fairly predictable from historical and current market data, government statistics, economic indicators, and demographics.
Because of the illiquidity of CRE, pricing is not prone to mob behavior that can take stock prices on a roller coaster ride – making returns unpredictable. Long-term CRE investments are immune to volatile market movements – making projections more reliable.
Leverage. Unlike stocks where borrowing is hard to come by because of its speculative nature, an investor can leverage bank lending to acquire real estate to multiply returns. A passive investment fund that leverages bank lending passes on the advantages to its partners.
Because lenders typically finance investment properties with down payments of just 20–25% of the sale price, instead of buying a single property for $1 million in cash, that $1 million can be used as down payments to acquire 4 or 5 properties.
Tax Benefits. Passive CRE investments offer a variety of tax benefits that are passed down to investors at the partner level. Some of the major tax benefits include long-term capital gains rates, avoidance of self-employment taxes like FICA, regular depreciation, and bonus depreciation.
Value-Add Opportunities. Through skilled management, CRE, more than any other asset, affords significant value-add opportunities through the property, operational and managerial improvements – significantly improving ROI through increased income from rents and long-term appreciation.
Is CRE good for your retirement portfolio?
You bet your life it is.
Just be aware of the pitfalls and make sure you’re investing in the right assets with the right partners to maximize your chances for success.
