When You Should Include CRE In Your Portfolio

When should you include commercial real estate (CRE) in your portfolio?   I think the more appropriate question is when is it not appropriate to include CRE in your portfolio?

If you ask any savvy investor who allocates a hefty portion of their portfolios to CRE, they will tell you that there is never a time when it is not appropriate to include CRE in your portfolio.

Why? Why not…

There are five pillars of wealth-building that only CRE investments boast. Some assets may boast only one or two of these pillars, but none can claim all five as CRE can.

These pillars are:

  • Income.
  • Appreciation.
  • Tax Benefits.
  • Tangible Asset.
  • Inflation Hedge.

Is there a better asset for generating, growing, and maintaining wealth than an asset like CRE? What about an asset that generates inflation-insulated income that allows you to keep and reinvest more of what you earn from tax benefits as well as provides long-term appreciation backed by a tangible underlying asset to boot?

More reasons to include CRE in your portfolio TODAY:

1. The Elite Of Elite Investors Are Doing It.

Some of the world’s wealthiest inventors, including ultra-high-net-worth individuals (UHNWIs) and institutional investors like pension funds, university endowments, and family offices, allocate a significant portion of their assets to real estate in their portfolios.

Some of the wealthiest and successful UHNWIs globally allocate more than 20% of their portfolios to CRE, and institutions like university endowments allocate more than 10%.

2. Higher Returns Less Risk.

CRE investments buck Wall Street’s risk-return paradigm that says you can’t achieve higher returns without incurring higher risk. CRE is uniquely positioned to buck this trend.

In the past 20-years, it has outperformed the S&P 500 Index but with less risk. That’s due to the stability of the asset class, because of long lockup periods of an investor’s capital, whether due to the illiquidity of the asset itself or the passive interest acquired through private investment in a real estate fund, CRE investments are insulated from stock and broader market volatility.

Illiquidity prevents investors from acting on whims and social media hype, and it’s the hallmark of CRE’s stability and reduced risk.

CRE offers reliable cash flow from long-term leases, and it’s this intrinsic value as well as the value of the underlying hard asset that contributes to long-term appreciation. Income and appreciation are formidable partners in wealth creation. Add tax benefits into the mix, and you have a deadly cocktail for exploding wealth.

3. Tax Benefits.

Passive investments structured as partnerships are the key to maximizing the tax benefits of CRE investments. Income from a private real estate fund structured as a partnership (LP or LLC) is designed to maximize tax benefits for its investing partners.

Passive profits distributed to the partners – as opposed to W-2 income from a job – are taxed at the individual levels at the capital gains rate for investments held for over a year. Compare the current top capital gains rate of 20% to the top tax rate of 37% for ordinary income, and you can see the benefits of investing in CRE immediately.

Besides the capital gains benefits, as a business, a real estate fund is entitled to deduct typical business expenses that can be passed onto its partners.

Typical deductions related to CRE include:

  • Depreciation (Bonus and Regular).
  • Property Tax.
  • Operating Expenses.
  • Repairs.
  • Mortgage Interest.

4. Opportunity Zones.

As part of the recent Jobs and Tax Act passed in 2017 (Tax Reform), to encourage private investment in distressed communities designated as Qualified Opportunity Zones, Congress established the Opportunity Zone Program and introduced significant tax breaks for passive investors who invest in Qualified Opportunity Funds that invest in Opportunity Zones.

The significant tax benefits offered to Opportunity Zone investors include:

  • Defer taxes on the original capital gain until the end of 2026.
  • Reduce up to 15% of the tax bill on the original capital gains if it remains invested in the Fund for at least seven years.
  • Eliminate the tax on any appreciation (new capital gains) on the original investment after the 10-year mark in the Opportunity Fund.

5. No Longer Out of Reach.

Passed in 2012 and with rules finalized on May 16, 2016, the JOBS Act ushered in a new era for private investments. By relaxing the advertising and general solicitation rules associated with private offerings, congress opened up previously exclusive private investments to more qualified investors than ever before.

Investors who previously thought the inclusion of CRE in their portfolios was out of reach due to the high financial and intellectual barriers to entry can now enjoy the diversification benefits of adding CRE to the mix through an investment in a private real estate fund managed by experienced operators and promoters.

By pooling capital with other investors, investments in CRE can be made at a fraction of the cost of a direct purchase.

When should you include CRE in your portfolio?  TODAY!

Adding CRE to an investment portfolio can only be a win. Who doesn’t like income, appreciation, and tax benefits – all backed by an underlying hard asset?