Why Invest in Commercial Real Estate?
Investors Who Diversify Into
Commercial Real Estate Outperform Those Who Don't
Earn better returns by investing in commercial real estate.
The “20% rule” states that an investor should have a minimum of 20% of their portfolio invested in alternatives like commercial real estate. This rule was made famous by the Yale endowment, which has outperformed traditional endowments made up of only stocks and bonds for the last 25+ years. In fact, an investor who invested using the 20% rule in 1995 would have earned about twice as much as an investor who used a more traditional allocation.
What makes real estate such a strong investment? If you’re looking for a way to grow your portfolio, here are four reasons to invest in commercial property.
Consistent cash flow
Unlike most stocks, commercial real estate generates consistent cash flow (income) from rent. For investors in need of regular income from their portfolio, commercial real estate can provide an attractive alternative to bonds, which also generate regular cash flow, but generally at much lower rates.
Earning potential. With the right location, commercial properties can expect an annual return between six percent and 12 percent of the purchase price, according to Cricket Realty Advisors president Matt Larson. This is much higher compared to a single-family rental, which can expect one percent to four percent annual return at best.
The yield on commercial real estate is usually higher than that on residential properties, both on a per square foot and an initial investment basis. This is especially true if you decide to lease or rent a multi-unit commercial property, says The Babb Group founder and CEO Danielle Babb. The more tenants you have, the more income you can generate.
Earning potential. With the right location, commercial properties can expect an annual return between six percent and 12 percent of the purchase price, according to Cricket Realty Advisors president Matt Larson. This is much higher compared to a single-family rental, which can expect one percent to four percent annual return at best.
Cash flow stability. Because commercial real estate leases are usually longer than residential leases, predicting cash flow year-over-year is easier.
Intrinsic value
Real estate is a hard asset – it provides intrinsic value through its use as a home, office, factory, etc. Real estate is also scarce. There is only so much land in a given area. As cities grow, demand for real estate increases, while supply is limited by geography. This is why real estate assets have historically appreciated in value over time.
There’s a good reason why Chinese investors have spent $21.1 billion on commercial real estate worldwide, with almost $5.9 billion of that money invested in the United States. If done right, renting out commercial properties will reliably bring in higher annual returns than many other investments.
Commercial properties diversify risk
If you own a commercial property and lease to multiple tenants, there’s a lower chance that you’ll lose your entire rental income in any given month. Sure, you might lose one or two tenants at a time, but you will still have other tenants helping you generate income. As opposed to a single-family residence, where your investment income is dependent on the rent of a sole tenant.
Commercial properties operate during limited hours
Businesses usually keep business hours. That means they are only operational during the day, and it’s less likely you’ll be called in the middle of the night to deal with a repair or a lost key, says Larson. For the rare instances in which you have an issue in the evening, you can install an alarm monitoring service that will automatically notify the proper authorities.
Tenant relationships are more predictable
Legally, the commercial property landlord-tenant relationship is between two businesses rather than two individuals. According to Larson, this makes the interactions much more professional and polite. “The landlord and tenant have more of a business-to-business customer relationship,” he says.
Remember
"Buy land, they're not making any more." - Mark Twain
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