As a conscientious investor, you’ve likely heard all of the common investing wisdom. You’ve heard to not time the market. You’ve heard about the value of diversification. You’ve heard about investing for the long term, rather than attempting to day trade. In your investment journey you may have read some of the classics like Random Walk Down Wall-Street, the works of the armchair experts, or the writings of the more armchair experts. All of these sources offer excellent advice, and have informed our investment strategies greatly. One thing that the common investing wisdom often leaves out, however, is the incredible benefits that real estate can have on an investor’s portfolio.
Real Estate vs. Equities
Equities, both domestic and international are the bread and butter of a portfolio. They offer numerous benefits, such as high average annual return, high liquidity, and a high degree of control in your investments. Real estate, however, offers a number of distinct advantages over equities, making it an asset class which cannot be ignored. Real estate investing is a great way to introduce leverage into your portfolio — using money from today to invest before it loses value to inflation. Another benefit of real estate investing is that it produces more consistent cash flows over time. With equities, you are usually realizing your gains due to appreciation. Real estate investing allows you to realize gains both from the appreciation of the asset as well as cash flow from every month that the property has tenants. The tax advantages of real estate investing are numerous — from depreciation, to the lack of FICA taxes on rental property income, to the possibility of performing a 1031 exchange. The tax benefits mixed with the consistent cash flows make for a powerful combination, where the tax benefits often yield the cash flows to be able to be recognized tax free.
Commercial Real Estate Syndications
But where to start with real estate investing? So many different ways to do it, so many locations, so much new terminology! The best way to think about the main different ways it can be done is to look at it in three distinct categories: REIT’s, single-family rental properties, and commercial real estate syndications. All of these can be good ways to get exposure to Real estate in your portfolio, but we believe that commercial syndications come out on top with all things considered.
REIT’s (Real estate investment trusts) are exchange-traded funds filled with diverse types of real estate in various locations. REIT’s are reasonable long-term investments, but they lack some of the traits that make real estate an attractive asset class in the first place. Because they are exchange traded, they end up having a higher correlation with equities (counter to the point of diversification) and higher volatility (because it is easier to perform short-term speculation on them). On top of this, they lack many of the tax advantages that an individual can get from a rental property or a syndication.
Purchasing a rental property is another common way to get exposure to real estate in your portfolio. While this is often a great strategy, this is also the most high-effort way to get exposure to real estate — requiring that you research your target area, your target properties, and manage the property once you own it. On top of this, the mortgage would be taken out in your name, so you would be personally liable for it. As the owner of a rental property, you can be held personally liable for accidents which occur on the property, and are personally responsible for maintaining it.
We have come to the conclusion that commercial real estate syndications are the best way for an individual to diversify their portfolio with real estate. As an investor in a commercial real estate syndication, you will get all of the same tax benefits as a rental property owner, and all the same benefits from leverage — but with some important extra advantages. As an investor in a syndication, you are not personally liable for the mortgage which finances the purchase of the property, nor for the liability of owning it. You will never have to deal with any late night phone calls from tenants, or stress about finding new tenants in the event that you lose one (we can handle that). Another benefit of investing in commercial properties is that the businesses are small or medium-sized businesses, rather than individuals. The leases for commercial tenants are longer term (usually 5–10 years) than residential leases, making the income streams more stable and vacancies fewer and further between. Lastly, commercial real estate investments are some of the least-correlated with equities markets that one can find — even less so than bonds. All of these factors combine to make commercial real estate syndications an attractive addition to any investors portfolio, and one that we hope you will consider.