Historically stocks and bonds were the only major asset classes monitored by institutions and individual investors. Yet within the past 10 years, commercial real estate has become another major asset class that has roughly fallen somewhere between high yield/high risk stocks and low yield/low risk bonds. Real estate is a tangible asset that has had a resurgence in past years due to the trading of REITS (Real Estate Investment Trusts) and institutional investors hedging financial risk. While it is important to consult with a financial advisor and work towards a balanced portfolio, here are some reasons we believe commercial real estate is a superior investment.
Leverage. Unlike stocks and bonds, real estate is unique in the ability to borrow credit to leverage the asset. Investors are able to purchase an entire building while only paying for a portion of the property. As is often the case, this can help increase investor yields while also mitigating risk and allows investors to use other funds to diversify their portfolios and purchase additional assets, whether it be more real estate or stocks and bonds.
Future Value of Money. Another great aspect of leverage described above is that you can buy a property today, using today’s value of money and then pay it back with future dollars. Many loans are amortized over long stretches of time, sometimes exceeding 20 years, which means that you will be paying your mortgage back with a more devalued dollar as an effect of inflation over time.
Control. When you are investing in stocks and bonds, you are conceding a certain amount of control with your money. Companies can pay dividends or decide to reinvest. Companies can internally make large or fatal errors, driving down stock prices, and you had no control over the outcome. Real estate is different in that you have a certain amount of control over your asset. You have the ability to increase your investment by making capital improvements, re-tenanting vacant space, or repositioning the asset from different types of obsolescence.
There are many other factors that we will discuss in future posts, but overall we feel that real estate is a superior asset class and should be held in some manner in everyone’s portfolio.