Sunday, April 21st, 2019 April21st2019

Sell for More Trivia: What are the advantages of owning commercial real estate?

Published on April 21st, 2019

Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.

 

We normally focus our content on the skill of selling commercial real estate…which is what we do.  Today, let’s take a moment to understand the benefits of owning commercial real estate in the first place.

When comparing owning commercial real estate to owning most other types of investments (we’ll use stocks for our comparison), there are 6 advantages:

Cash Flow

The positive cash flow from commercial real estate is a major advantage over owning most other types of investments.  Stocks can provide some cash flow from dividends but the average dividend yield on the New York Stock Exchange is only about 2%.  It’s hard to get excited about 2%.  Well managed commercial real estate should have cash flow of at least 8%.

Deferred Capital Gain Taxes

1031 exchanges on the sale of investment properties allow investors to defer capital gains taxes (and recaptured depreciation) for decades.  Or if they hold the property until their death, the tax can be eliminated all together.  Sell a stock and you’ll pay the capital gain tax in that tax year.

For more information about 1031 Exchanges, click here to get a free copy of my book True Wealth: What Every Seller Should Know About 1031 Exchanges.

Depreciation

Depreciation on real estate shelters income, reducing the investor’s income tax burden.  No such tax benefit exists for owning other asset classes.

Debt

Using debt to buy property substantially increases an investor’s cash-on-cash return.  This is a huge advantage.

Inefficient Market

In an efficient market, everyone has the same information.  And you buy at whatever the market price is.  When buying a stock, investors have no legal way to buy a stock below the established market price.  The real estate market, on the other hand, is a perfect example of an inefficient market. The price of a piece of property is determined by what the seller and buyer agree upon.  You make an offer and, if the parties agree to it, you have a deal.

It’s far more advantageous to invest in an inefficient market because you may have information that the seller doesn’t.  And this can make your investment worth much more than what the seller thinks it’s worth.  For example, a buyer may see a property from a different perspective than the seller.  The buyer sees the property, not as it is, but for what it has the potential to become.  The seller instead sees the issues that plague his property.  He doesn’t think it has any more potential.  Who has the more accurate view?  No one knows with certainty, even when the sale price is agreed to between seller and buyer.  But over time, the property’s true potential will become readily apparent.

Control

Good luck affecting the market price of a stock.  With commercial real estate, however, there are many ways to increase its value:

    • Make improvements
    • Upgrade management
    • Add tenants
    • Renegotiate or extend leases
    • Change the zoning
    • Combine parcels
    • Break-up sale

In commercial real estate, you actually have quite a bit of control over your investment and its potential for growth.

Inflation Hedge

What happens if high inflation hits again?  If your rents, over time, increase with the rate of inflation then you’ll be fine.  Living off the cash flow from your real estate portfolio means you never need to sell your properties to maintain your lifestyle.  In fact your properties will likely continue to appreciate, you’ll pay down your debt and your equity will grow.  Real estate is universally considered one of the best inflation hedges available to investors today.

Knowing this, why would anyone buy stocks rather than commercial real estate?  The answer is you can buy stocks with a few clicks.  It’s just easier.  Also, you can buy a share of many stocks for less than $100.  You won’t find many commercial properties below $500,000 that are worth buying.  With an 80% loan, you’ll need to come up with about $100,000 to purchase the property.

In conclusion, I’ve studied both investment options more thoroughly than most…and I can tell you my money is in real estate.

 


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About Beau Beach, CCIM

Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.

Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee, South Florida and Chicago markets.

He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.

Beau can be reached at 414.324.4938, 615.603.9770, click to schedule a call or Beau@ProwessIRES.com