My Favorite Asset Class
Why be satisfied with a fast food meal with empty calories when you can have a 10-course meal that will leave you satisfied?
That’s what I 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 can leave them empty, I prefer something tried and true that will keep my portfolio healthy for the long term.
What Is My Favorite Asset Class? Commercial Real Estate.
Like I alluded to above, investing in commercial real estate (CRE) is like a 10-course meal that leaves you satisfied – not just for a fleeting moment – but for a long time.
Here are my reasons why CRE is my favorite asset class:
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.
Cash-flowing CRE can reward the investor with an income from rents and leases independent of timing and cash flow that can be reinvested to accelerate wealth building.
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 hard immovable asset that has underlying value. It can never lose its entire value. It may experience dips here and there, like during the early days of the pandemic in 2020, but it’s also quick to recover. The stock of a failed company may never come back.
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.
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.
Long lockup periods along with restrictions on transfer shield CRE from broader market volatility – ensuring its long-term viability.
Leverage Of Human Capital.
Passive CRE investments allow investors to co-invest with experienced professionals to 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 Financial Capital.
Financial leverage in the form of commercial real estate loans allows 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.
Saving a penny is just as valuable as earning an extra one, and the tax benefits of CRE ownership allow investors to keep more of what they make. 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 force growth.
By recognizing and addressing inefficiencies, CRE investors or their co-investors can take advantage of opportunities to add value to properties they acquire by improving management efficiencies, renovations, and marketing strategies. These value-add strategies increase NOI from improved occupancies and rents, contributing to a higher selling price in the future.
Through CRE investments, investors can truly diversify their portfolios to protect cash flow and growth through a variety of factors. By investing across a variety of asset classes, geographic locations, entity structures, lockup periods, experts, profit distribution and arrangements, investors can mitigate risk and insulate their income stream from downturns.
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?
The ideal hedge against inflation is an asset that keeps pace with rising prices – especially one that not only produces income that keeps pace with inflation but where its underlying value keeps pace as well. CRE is ideally suited to hedge against inflation because people will always need places to live and work.
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 I 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. I am one such mentor. Feel free to reach out to me, and I will be in contact shortly.