Investing in commercial real estate (CRE) is a recognized means for building and accumulating wealth, a premise that is supported by studies and surveys on the historical benefits of these types of investments.
According to one survey, 23% of participants believe CRE is one of the best ways to build personal wealth. Further, according to another report, the average high-net-worth individual’s (HNWIs) portfolio in direct and indirect real estate investments totals 34%. That figure is comprised of 21% of investors who typically gravitate toward direct investments in real estate property and 13% who invest in alternatives such as Real Estate Investment Trusts (REITs).
Beyond direct wealth building, there are additional benefits that further enhance the popularity of CRE investments, including:
Portfolio diversification—Portfolio diversification, by location and property type, reduces an element of risk exposure to any one type of investment
Hedge against inflation—Inflation proves an advantage in CRE when rental rates increase in response to inflation. Property values also tend to increase when adjusted for inflation.
Stabilized returns—Income producing real estate investments can provide ongoing, predictable returns.
Tax benefits—Depending on the investment, certain tax benefits may be realized, including depreciation and the option for deferred taxation.
Choosing real estate investment structures:
Direct investments in CRE come in a range of opportunities. A direct investment occurs when an individual or an investment group acquires and actively manages a property. Because of the investors’ involvement, it is known as an active investment.
There are alternative, passive structures where a HNWI, as a limited partner and passive investor, can take part in a single property acquisition or a fund that will acquire several properties. Investment fund managers, like Next Realty, have developed a level of expertise and track record for managing property through the real estate investment lifecycle. This includes developing a unique investment strategy, raising capital, acquiring, and managing assets, the preparation of the necessary tax and financial reporting docs, and dispositions.
The benefits of fund investing:
Investing in a fund versus an individual investment is a matter of choice. There are significant benefits to choosing a fund structure, including:
Diversification—A diversified property portfolio provides a hedge if one property does not meet performance expectations.
Capital raise/commitment of capital—A fund that has firm commitments, for example, has available equity at the ready to move quickly and confidently to create the entire fund portfolio. With a greater level of capital, more properties can be acquired.
Economies of scale—When an investment sponsor has a portfolio of properties it can achieve certain efficiencies and economies of scale in the management and operations of the property, such as in the areas of property insurance and leasing.
The advantages of investing with a fund manager:
There can be significant benefits to investing through an experienced fund manager, particularly one like Next, whose principals invest significant capital alongside their investors.
These include:
Experience/expertise—Over the course of 25 years, Next has developed an expertise and track record approaching each portfolio property investment with a unique business plan and operating a Multi-Solution® strategy that typically would not be available with one-off pooled investments.
Agility—Real estate is subject to cycles, both headwinds and tailwinds. A manager that has successfully navigated myriad cycles can react more quickly and with greater agility to economic and other external factors impacting the investment.
Access to internal and external resources—Depending on its size, a fund manager will either have a full complement of resources on staff, or longstanding relationships with brokers, property managers, attorneys, lenders, and other professionals needed to manage an asset/portfolio.
Access to deal flow/opportunities—Similarly, fund managers have deep relationships and are well informed about opportunities in the marketplace which is critical in creating a pipeline and accessing both on- and off-market opportunities.
Real estate is an established and proven vehicle for wealth generation. Investors have many factors to consider and opportunities to evaluate before delving into the CRE market. According to Andy Hochberg, CEO and Managing Partner, “To be successful, investors must make well-informed and well-researched decisions that weigh investment objectives tempered by risk tolerance.” Armed with the options, investors can navigate their way to include CRE in successfully diversified wealth strategies.
