There’s no one-size-fits-all strategy or easy way to quickly grow your net worth when it comes to investing. However, diversifying your portfolio the right way can significantly reduce the risk of incurring losses.
And if you’ve even briefly glanced at the stock market over the past few months, you know the roller coaster ride involved with investing in these markets. Money that was steadily growing just several months ago is suddenly worth far less today.
This is one of the main reasons many experts recommend real estate investing. These investments are much steadier and backed by physical assets, making it more challenging for your investment to suddenly disappear. Yet, despite the lower risks and increased benefits that investing in real estate provides, not all of these investments are created equal. So, to mitigate your overall portfolio risk and ensure future growth, diversify with different asset types, classes, and, more specifically – commercial real estate properties.
What is Commercial Real Estate?
So, what is commercial real estate? According to investors, it’s any property that generates profit through rental income or capital gains. Generally speaking, commercial real estate is categorized for investment purposes, which include:
- Industrial Properties
- Office Space
- Hotels
- Retail Property
- Multifamily Dwellings
- Self-storage
Why Invest in Commercial Real Estate?
Perhaps the best reason to invest in commercial real estate is that it has the potential to deliver the stable returns and appreciation investors want, even during times of economic crisis.
Regardless if you’re considering investing in office space, warehouses, or self-storage units, here are a few reasons you should diversify your portfolio with commercial properties:
Hedge Against Inflation
Investors who diversify with commercial real estate historically do well even during the worst economic times. In fact, experts have found that over five-year holding periods, the returns from commercial real estate properties outpace inflation nicely. In the short term, these investments correlate with inflation, which is still good protection against it.
The Creation of Cash Flow
Commercial real estate properties potentially offer passive income that’s higher than that which is paid out by bonds or dividend stocks. This stable income can provide diversification and protection against market volatility, as (historically) commercial properties do not move in sync with bonds and stocks.
Provides Leverage
One of the biggest benefits of investing in commercial real estate is the ability to borrow debt against the property to increase the purchasing power of each equity dollar. In turn, this increases the property’s total return potential, but beware, this also increases the risk.
Tax Benefits
Investing in commercial real estate can also be one of the best ways to get additional tax benefits. Taxes on cash distributions can be sheltered or deferred using deductions related to interest expense, depreciation, and other items.
How to Begin Diversifying Your Portfolio with Commercial Real Estate
Here are some suggestions for getting started in commercial real estate investing:
Create a Realistic Goal
Just as with investing in stocks, bonds, or cryptocurrency, you need to set well-defined and attainable objectives. But, since returns on leased properties are not subject to drastic gains and losses, don’t expect substantial short-term returns.
Many investors create an exit strategy, which is usually for a time when the markets are stable, demand is strong, and the property has appreciated.
Choose a Location You Know
Markets across the country can vary as much as the scenery of the country itself. So, when starting out, begin with properties closer to home.
Add Sweat Equity
Add sweat equity anywhere you can, as this will help reduce your overhead costs. Think of simple projects such as general accounting, minor exterior and interior remodeling or maintenance, or any other chore you can handle.
Start Out Small
Real estate investing can require more time than investing in bonds or stocks. This is why first-time commercial property buyers are advised to start with smaller properties, such as single-tenant retail or small apartment buildings. Such properties require less time and capital but still provide financial and ownership rewards.
Seek Professional Advice
As with any long-term investment, with the opportunity for great reward comes potential risk. So, don’t go it alone on your first try; work with a professional investment team who can help you achieve your goals.