Article 1 of 5: Real Estate As An Investment Option

This is the first in a series of five pieces to help investors understand the benefits of owning commercial real estate, then differentiate the dynamics and variety of ownership channels.

For centuries, the two asset classes creating the most wealth have been stocks and real estate.  Today, most people’s first investments are in stocks or stock funds. Established investors should consider adding real estate investments to enhance their portfolio.

Real estate has a different return composition

Over the long term, U.S. stocks (i.e., the S&P 500 Index) have averaged annual returns in the 11% range.  This comes mostly from appreciation and a modest (around 2%) dividend.  Established real estate investments have comparable total returns, but a different return composition, with about 70% of the return coming from income. There are also tax advantages that can improve after-tax return. Both stocks and real estate investments can benefit from long-term capital gain tax rates, but real estate can offer additional tax benefits from pass-through depreciation. 

Real estate has a lower risk profile than stocks.   

Stock prices can fluctuate dramatically with quarterly earnings surprises, broad stock market gyrations and investor emotions.  Real estate prices are driven by demand, net operating income (NOI), and interest rates, which all move more slowly.  Demand can be driven by sector (apartments or warehouses, e.g.) or by the growth or decline of a specific market.  Rising borrowing costs can restrict net income, however this is often offset by price appreciation in an inflationary environment.

Real estate behaves differently than stocks during economic cycles. 

Stock prices are driven by earnings expectations and rise or fall in anticipation of changes in corporate earnings and broader economic forces.  Building values tend to be much more stable through cycles, as values are determined by consistent rental income rather than less predictable corporate profit  expectations.  

Geography and sector diversity are important considerations. 

The types of buildings you invest in and their location are important.  Population shifts, regional economies, state-specific tax and business climates all impact real estate.  

To learn more about how real estate can be classified by sector, location, and risk/return characteristics, read the next blog in our real estate series, “All Real Estate Investments are Different”.

If you’re interested in learning more, reach out to us about your situation.  

In our second installment, “All Real Estate Investments are Different, ” better understand geographic and sector diversity.”