Why Wealthy Investors Prefer Commercial Real Estate
What is the difference between those who lose wealth and those who maintain it?
Like the 70% of lottery winners who go broke and many pro athletes who end up filing for bankruptcy, individuals who lose their wealth all share a common thread: They spend their money on assets that diminish their wealth instead of building it up.
Cars, clothes, expensive vacations, and fancy restaurants are diminishing assets that only serve to deplete wealth. Those who successfully maintain and grow their wealth put their money in a different type of asset – productive ones, assets that add to a person’s wealth and not take from it.
There are two types of millionaires:
- Those who are self-made.
- Those who inherited their wealth.
No matter how a person becomes a millionaire, the one asset an overwhelming majority of them invest in is commercial real estate (CRE). Self-made millionaires are particularly fond of CRE, with 77% saying they own investment real estate according to one study.
Many self-made millionaires who made their wealth from owning a business have a particular affinity for CRE because income-producing businesses and CRE share many similarities including:
- Cash flow that can be reinvested.
- Tax benefits that grow and preserve wealth to name just a few of these similarities.
However, business owners don’t want to run their businesses forever. They put in the hard work to grow their successful businesses but eventually sell them or pass them on to their children because they no longer want to put in the time or energy to sustain them.
They still covet the cash flow, appreciation, and tax benefits but without the headaches. That’s why many self-made millionaires turn to CRE. CRE can provide these benefits while offering opportunities to invest passively.
Here are the major reasons why wealthy investors prefer commercial real estate:
They Are Not Looking For A Quick Return.
The wealthy think long-term and seek assets that will offer reliable, sustainable long-term returns. CRE has long been a reliable source of cash flow derived from rents generated from multifamily, office, retail, and warehouse leases.
They avoid speculative assets like stocks that although may provide a quick return can also go south very quickly. The wealthy crave consistency supported by solid underlying economic fundamentals. CRE fits this mold.
They Value Appreciation.
The wealthy are particularly attracted to assets that appreciate in value over time – especially ones that outpace inflation. CRE growth has consistently outpaced inflation over time because of its intrinsic value – value derived from its productive qualities.
Assets with established histories of income extract a premium when it’s time to sell. That’s why CRE appreciates independently of inflation and outpaces it. The wealthy don’t park their capital in assets that are depleted by inflation. That’s why they avoid treasuries, savings accounts, CDs, and money market accounts with returns that don’t keep up with inflation.
CRE Is Not Subject To Short-Term Fluctuations.
CRE is illiquid. Sudden movements in the broader markets because of the ultra-liquidity of stocks does not affect CRE because it is not easily transferable. The illiquid nature of CRE shields it from irrational market movements – ensuring its long-term viability.
CRE Can Provide Multiple Streams Of Income.
By investing passively in multiple private real estate investments or real estate private equity funds, the wealthy are able to create multiple streams of passive income that cash flows year-round. This passive income can replace the income many of the wealthy had been used to from their personal businesses.
The tax benefits of CRE ownership have long been a big draw for wealthy investors when saving a penny is just as valuable as earning one. The various deductions as well as the capital gains treatment of income and appreciation offer significant advantages to the wealthy for preserving more of what they make.
CRE investments lend themselves to leverage where commercial loans require only a fractional capital commitment (20%-25%) from the investor. Instead of putting 100% of investable capital into one property, that capital can be spread out over 4 to 5 properties – generating multiple streams of income instead of just one.
With low-interest rates and a promise by the Fed to keep them low for the next five years, there’s little reason not to take advantage of bank financing to acquire multiple properties.
CRE investments – especially passive investments – lend themselves to true diversification across a variety of factors that can serve to mitigate risk and insulate income. By investing across a variety of asset classes, geographic locations, lock-up periods, experts, and compensation structures, investors can provide themselves with consistent, reliable income and growth insulated from downturns.
They Invest For Demand.
People are always going to need a place to live and places to work.
The growth of stock prices are unpredictable and are influenced by factors such as human behavior that can not be quantified and that have no foundation in underlying economic metrics.
The wealthy avoid stocks because of this lack of control over the direction of their price and, in turn, their growth. They know there is little they can do to force a stock to grow. CRE on the other hand can be forced to grow.
Assets offering value-add opportunities through the implementation of management efficiencies, property improvements, and marketing strategies, allow investors to force growth through increased NOI from improved occupancies and rents.
Can you think of another asset more ideal for growing and preserving wealth?
The wealthy can’t. That’s why they overwhelmingly favor cash flowing CRE over any other alternative asset for achieving and maintaining financial independence.
Michael Foley, president and CEO of Humabilt Capital, oversees the entitlement process, funding, and operations for Humabuilt Capital. Mr. Foley has been a full-time real estate investor since 1995 during which time he has developed hundreds of single-family homes, townhomes, condominiums, and apartments. Mr. Foley started his investment ventures in Long Beach, California, and has expanded to Apex and Durham North Carolina. Mr. Foley is a graduate of the University of California at San Diego.