Investing in, building or buying real estate and property isn’t like spending $2,000 to buy shares of Amazon or any stock that you can easily sell off in a few months if you change your mind. That said, in today’s market – when the stock market is in negative territory, interest rates are rising, and a national recession seems imminent – there are reasons to explore the real estate market.
PASSIVE INCOME
It seems the majority of people invest in real estate for the steady flow of cash they earn in the form of passive income. This passive income can be a great incentive to get you started and make your first (or tenth) investment. Depending on the location, investors could earn significant income to expenses and make extra money on the side. By investing in real estate, you can literally make money while you sleep. This approach to income is much different than “active” income, such as showing up for work each day, where your time and income are linked. This helps build financial independence.
INFLATION HEDGE
Commercial real estate can help minimize the negative impacts of inflation as part of a diversified investment portfolio. When inflation gets high, rental income and property values tend to increase significantly. Real estate investors welcome inflation with open arms because as the cost of living goes up, so does their cash flow.
CAPITAL APPRECIATION
Appreciation is defined as the return on invested capital resulting from the growth in value of an investment relative to the amount of capital used to purchase and improve the real estate. Real estate values tend to increase over time, and with a good investment, you can turn a profit when it’s time to sell. Rents also tend to rise over time, which can lead to higher cash flow.
TAX BENEFITS
We get into more detail on this topic later, but real estate investors can take advantage of numerous tax breaks and deductions that can save money at tax time. While you should consult your financial advisor or accountant before investing, there may be tax benefits to owning commercial real estate. In addition to the ability to deduct interest expenses, depreciation is one tax advantage because it is a non-cash expense deduction.
DIVERSIFICATION
Another benefit of investing in real estate is diversification. Real estate has a low correlation with other major asset classes. This means the addition of real estate to a portfolio of diversified assets can lower portfolio volatility and provide a higher return for the risk.
CONCENTRATION
Many individuals or homeowners have only one holding, which is their primary home. On the contrary, most investors in commercial real estate diversify their investments geographically and across sectors – such as multi-family apartments, office space, retail, hotel, etc. In general, real estate is less prone to being impacted by news or economic policies than traditional investments. For example, individual stock prices may move daily or by the hour due to news releases about earnings expectations, management changes, market manipulation or speculation, mergers or acquisitions, or a variety of other items. Real estate on the other hand moves slow – leases are longer term contractual obligations, while operating expenses, vacancy or interest rates, and new development are judged annually.
There are many reasons to invest in commercial real estate. As investors become more versed in these types of investments, they can personalize their strategies to maximize the value for their needs.