Why be satisfied by fast-food with empty calories when you can have a full-course meal that will leave you satisfied? That’s what we compare investing to my favorite asset class vs. the favorite asset class of the masses. While the crowds like the cheap thrills of the stock market and crypto which can leave them empty, we prefer something tried and true that will keep my portfolio healthy for the long term. What Is Our Favorite Asset Class? Commercial Real Estate. Why? Like we alluded to above, investing in commercial real estate (CRE) is like a full-course meal that leaves you satisfied - not just for a fleeting moment - but for a long time. Here are my reasons why CRE is our favorite asset class: Cash Flow. Cash flow is what sets CRE apart from stocks and crypto. Making money in stocks or crypto is all about timing and if you can sell for more than what you bought the asset for. CRE can provide a strong stable cash flow and like stock dividends can be structured to deliver regular distributions to investors each month, quarter or annually. But unlike stock dividends the return is usually greater. The Underlying Asset Matters. Unlike stocks and crypto, the underlying value of real estate is quantifiable and matters. Meme stocks of bankrupt or failing companies popular with the crowds are dangerous because once the public loses interest, there is no bottom to the stock price. Real estate is a tangible asset, one that you can see feel and touch. It has intrinsic value because of what it is, not because people attribute a value to it. Appreciation. Because real estate is a tangible asset and supply is limited because it can’t be mass-produced, its value will grow over time. In addition, cash-flowing real estate with a track record of performance will also contribute to price growth independent of the natural appreciation of the price of all commodities over time. Assets with established histories of income extract a premium when it’s time to sell. Compare the appreciation of a piece of land that just sits there and one that’s been developed and cash flows. Which one do you think will appreciate at a higher rate over time? The one that’s productive. Stability. CRE is illiquid. Unlike liquid stocks and crypto that are susceptible to herd behavior that causes wide price swings, CRE is insulated from such volatility because it’s not easily traded. Even when market cycles fluctuate for one reason or another CRE remains a desirable investment thanks to its stable nature. Invest With Experts. Passive CRE investments allow investors to co-invest along with experts who leverage their knowledge, expertise, processes, and infrastructure. This is done to profit from a diverse portfolio of assets across multiple geographic locations without having to overcome the substantial learning curves and time and capital barriers of doing it on their own. Leveraging the expertise of others allows investors to create multiple streams of passive income that allow them to use their time elsewhere. Leverage. CRE likely to appreciate and commercial real estate loans allow investors to make their money go further. Because secured loans only require a fractional capital commitment (20%-25%) from the investor, the investor can multiply the value of assets it can acquire by a factor of four or five. Even when considering loan servicing, the higher cash flow and appreciation from four or five properties versus one accelerate wealth exponentially. Tax Advantages. When you invest in stocks and bonds, you can expect to put aside a portion of your earnings to pay capital gains taxes. Unless the investment is part of a qualified plan or retirement account, these taxes are hard to avoid. The multitude of tax benefits associated with CRE and passive investments such as the pass-thru of deductions, capital gains treatment of income and appreciation, tax deferral, and the avoidance of self-employment taxes, offer significant tax advantages to investors - allowing them to pad their wealth by keeping more of what they make. Opportunities To Force Growth. No matter how hard you try, you can never force the growth of a stock. Forces control stock prices out of your control. The same rules do not limit real estate. Unlike stocks, CRE offers opportunities to add. CRE investors can take advantage of opportunities to add value to properties they own by addressing efficiencies through property improvements, improved management practices and marketing strategies. These value-add strategies increase NOI from improved occupancies and rents, contributing to a higher selling price in the future. Diversification. Diversification protects you against losses. Through CRE investments, investors can truly diversify their portfolios to protect cash flow and growth through a variety of factors. If one investment class performs poorly, you can still reap gains from others. A truly diverse portfolio will go beyond just investing in stocks and bonds and include assets like CRE. Hedge Against Inflation. Inflation has been in the news a lot lately because it’s getting out of hand. Last week, inflation grew at the highest month-to-month rate in 30 years. Higher prices mean diminished buying power. How do you hedge against lower purchasing power? CRE is ideally suited to hedge against inflation because people will always need places to live and work. One advantage of CRE is that it can offset the long-term impact of inflation. A major factor is the fact that property rents can be adjusted with inflation, which is often the result of strong economic growth. This is quite different from investments such as stocks or bonds in which inflation can yield diminishing returns. There are so many reasons to love the CRE asset class, but there’s one I have left out, and that is the opportunity to learn about it from others as we did. Leveraging the knowledge of others isn’t limited to just handing over the capital. It can also mean leaning on and learning from others who have already walked down the path that you’re considering. If you’re seriously considering investing in CRE, seek out mentors to guide you along the path. Feel free to reach out to us, and we will be in contact shortly. Investing for Freedom, Rob Graham and Ben Trautwein -The Graham Group-
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