Why Commercial Real Estate

Cash is King

There is nothing better than a cash flowing property. Cash flow provides a steady flow of income, which in turn also pays for the expenses & mortgage. Provides protection and diversification against the volatility of the financial markets

Power of Leverage

A major benefit of CRE is ability to place debt on a property which increases the purchasing power of each dollar of equity. For example buying a property worth 1 million dollars with 25% down payment leads to a debt of 75%, which when sold for 1.25 million results in 100% cash return. If the same property is purchased with 100% cash, it would result in only 25% cash return at sale.

Tax Benefits

All properties are depreciating assets and every property depreciates over its specific designated life span. This includes the appliances and equipments inside the property. Hence, tax benefits are through depreciation of straight line, bonus depreciation, Cost segregation analysis, Expenses etc which then offset the cash flow via passive losses. Refinance is a tax-free event and equity taken out during refi is tax free essentially. The profits at sale and the depreciation re-capture at sale are taxes at long term gain rate and depreciation recapture rate of 25%. However, these can be offset by investing in 1031 exchange, QOZ funds or from bonus deprecation of investing in another property in the same year of sale of first property. Tax benefits of REPS (Real Estate Professional Status) can be used to offset non-passive income (W-2 income, other 1099 income)

Hedge Against Inflation

Commercial Real Estate investing is one of the greatest hedge against inflation. A multifamily that houses multiple tenants, even in the worst recession retains majority of its tenants (at least for Class B and C asset type), as housing is a basic human need, like food and water. Per TIAA-CREF, “If inflation emerges, investors in commercial real estate will likely withstand it according to the historical performance of the asset class. Over five-year holding periods historically, commercial real estate returns outpaced inflation nicely. Over short term periods, commercial real estate returns have been modestly correlated with inflation demonstrating their ‘inflation hedging’ capacity.”

Tangible Asset

This is a physical asset class, unlike wall street. Additionally, there is also almost complete control of the asset in terms of its performance via value add and other business models, depending on the property. The pride of ownership of a asset like CRE cannot be valued.

Private real estate has outperformed US equities and fixed income on an absolute and risk-adjusted basis since 2000.
Source - Bloomberg

Real Estate Income and Inflation | Indexed, 1996 = 100
U.S. property prices and income have historically outpaced inflation, making real estate an attractive investment option.
Source - NCREIF; inflation; Moody's Analytics; 01 Jan - 31 Dec 2021

Chart depicting cap rate spread during Recession of 2007-2010 and post Recession after 2010 recovery phase
Blue Graph is the Multifamily investment (Apartment) which, despite Recession years has had most stable cap rate spread (Refer to Formulae section for Cap Rate Spread)
Narrow Cap Rate Spread - Phase of Economic Stability
Wide Cap Rate Spread - Phase of Economic Uncertainity (during