WHY CHOOSE COMMERCIAL REAL ESTATE INVESTING?
“Property is the fruit of labor; property is desirable; is a positive good in the world. That some should be rich shows that others may become rich and, hence, is just encouragement to industry and enterprise.” – Abraham Lincoln
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Real Estate Is The Proven King Of Wealth Creation
“Ninety percent of all millionaires become so through owning real estate.” – Andrew Carnegie
What they don’t want you to know is that real estate has always been the number one generator of wealth since humans turned from nomadic existence to settling down and staying in one place. If you examine emperors, kings, queens, princes and royalty throughout history, in addition to gold and jewels, their largest source of wealth was land. To further the case, they don’t start wars over stock markets but almost every war in history was fought over land and religion.
Real estate arguably has created the most millionaires in the world. Just take a look at the Forbes List of Wealthiest people in the world, even if they did not make their original fortune in real estate, they hold a large majority of their wealth in real estate. High net-worth investors (HNWI) typically allocate around 15-30% of their portfolio to commercial real estate, which provides monthly or quarterly income, and growth (appreciation) that easily outpaces inflation.
Wealth creates financial freedom and improves options for creating flourishing lives. Increased wealth improves health, education, and our environment while alleviating poverty.
The Real Estate Business
“Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy.” – Marshall Field
The real estate business at its essence is a very simple business. You buy a piece of property, you find a tenant, you agree to terms in a lease. The tenant pays you a periodic rent (mainly monthly), the property usually goes up in value (driven by rental increases, demography, improving the land or property, surrounding development, or land scarcity). You can add leverage to your investment (mortgage or financing), and you can sell, refinance, or hold for generational wealth.
Additionally, many jurisdictions increase the attractiveness of real estate investment by awarding preferential tax treatment to encourage development.
The Benefits of Real Estate Investment
- Consistent Income – Regular Cash Flow
- Generates Wealth – Preserves Wealth
- Hard Asset – The Security Of Tangible Value
- Leverage – You Can Buy More With Borrowed Money
- A Hedge Against Inflation
- Unique Tax Advantages – Tax Efficient
- Historically Stable Asset – Slow To Rise And Slow To Fall
Commercial Real Estate Investments Create Recurring Income and Cash Flow
“Real estate investing, even on a very small scale, remains a tried and true means of building an individual’s cash flow and wealth.” –Robert Kiyosaki
In most investment strategies like stocks, IPOs, coins, precious metals, precious stones, bitcoin, etc., you are hoping to buy something that will appreciate in value, then sell it later for a profit.
Real estate creates produce or is a place to produce, which creates rents which is income. At its most basic level, real estate is land which produces crops, cattle, trees or minerals. Those are the building blocks of material existence and the basis for income. The next level up is renting out your land for a share of the production and then eventually contracting for a specified rent. Rental contracts are known as leases. Commercial property leases vary in length, but the benefit of our strategy is that the average lease is 10 years with multiple renewal options for 5 – 10 year extensions.
Long term contractual obligations create consistent income streams. You may have heard real estate is all about “Location, Location, Location” which is generally true, but the main attraction to commercial real estate is “Cash flow! Cash flow! Cash flow!” The formula is simple (Income = Rents – Expenses) and Income equals Cash Flow for you the investor.
Commercial properties are advantageous because of the stronger finances of corporate tenants, predictable income and expenses associated with longer term leases, negotiated rent increases, and the Net Lease (NNN) structure. Net-Leases, also known as Triple Net and NNN leases pass on the expenses of the taxes, insurance, and maintenance to the tenants, giving the investments more certainty of projected returns.
Liberty Real Estate Fund invests in Single-Tenant Net-Lease properties which are among the most consistent properties at paying regular rent* because they are leased to quality brand name tenants with minimal management obligations or expenses.
Related Link: Single-Tenant Net Lease – Explanation Of A Net Lease
Real Estate Generates Wealth while it Preserves Wealth
“No other investment has had such a consistent and positive effect on the average person’s net worth as real estate ownership.” – Gary Keller
By any measure, real estate is by far the most significant storage of wealth, representing more than 3.5 times the total global GDP. As time goes on, real estate values have always increased in the long run even despite price fluctuation in the market.
Rent increases and property appreciation are bulwarks against inflation while real estate is a great store of value as a physical asset that provides stable returns over long periods of time, protecting the invested wealth while simultaneously generating new wealth. Real estate investments have also generally appreciated over time, so investors hold the same properties with more value added at no cost to them.
When investors choose a stable, solid property to store their wealth, they create passive income for themselves from the appreciation of value over a longer period of time. Real estate investments are lower risk than most and can provide high returns as long as investors are patient to let properties appreciate in value. Rent increases have also been growing for decades, which also increases the return on the real estate investment.
Legacy or estate buildings also stand as prime examples of long term preservations of wealth to passed on to heirs or to gift to a favorite charity or cause. These buildings are set up to preserve the initial value of the investment and appreciate over time to create more valuable, physical assets.
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Real Estate is a Hard Asset – It Has Tangible Value
“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense … it is about the safest investment in the world.” – Franklin D. Roosevelt
Real estate is a “hard” asset like gold, precious stones, oil or other metals that have intrinsic value because of their physical substance or other valuable physical characteristics.
The “REAL” in “Real Estate” is that you can touch it, build on it, grow food, mine for precious stones and metals, drill for oil and water, manufacture goods, create, distribute, sell, and even mine Bitcoin. You can also sub-divide it, rent it, lease it, borrow against it, create interests including development, air, mineral, and water rights and any number of the other thousands of things you can do with real property. The last line of the Liberty Real Estate Fund Mission Statement pretty much sums up the intrinsic values of real estate “The portfolio generates value to individuals and businesses by providing places to live, work, eat, love, relax, worship, create and provide services to others.”
Real estate has a finite supply which means it is in limited supply. Some areas are much more limited than others due to demand. You can see this phenomenon in the major cities of the world. Land is such a scarce resource that giant skyscrapers are constructed to cram more people into a limited area. This also makes those areas extremely valuable.
Real Estate Allows Investors To Use Leverage To Buy More Property
“Give me a lever and a place to stand and I will move the earth.” – Archimedes
Leverage in real estate investments allows you to magnify your investment, provided that it is done prudently.
Leverage in the form of financing allows you to buy bigger properties. Financing in the form of mortgages and bonds, is available for most property types. Most lenders today loan up to 70-75% of the purchase price, however, the goal isn’t to always maximize leverage. With increased leverage comes increased mortgage payments, which pushes the risk for the investment higher. At Liberty Real Estate Fund, we are conservative in our approach to minimize investment partner risk. We believe using 55% leverage provides the best of both worlds: Utilizing leverage to promote healthy returns, while not exposing our investors to undue risk.
In practical terms when Liberty Real Estate Fund acquires a property for $2,000,000, use leverage of 55% which equates to $900,000 of equity and borrowing $1,100,000. The beauty of this system is that the income produced by the property pays back the lender’s interest (their rent for the borrowed money) and pays down the principal which adds to equity. In this example, owning the property for five years (assuming a 4.5% interest rate or a 25 year fixed term) would have built up $136,085 in equity through payment of the mortgage principal.
The best part of this arrangement is that the tenant’s pay for the mortgage through their rent. The tenant is building your equity. Paying off the loan is another way that real estate investing works to grow wealth while you sleep. Every payment is taking you towards financial freedom which is true Liberty.
Related Link: The Different Ways of Financing Commercial Real Estate
Real Estate Creates A Hedge Against Inflation
“One of the things that I like and continue to like about real estate is that it has been, and I think will continue to be, one of the more reliable inflation hedges among all the asset classes.” – Burton Malkiel, Princeton University economics professor and author of A Random Walk Down Wall Street
Real estate has traditionally been an excellent hedge against inflation because it appreciates in value over time. Over the past 500 years, real estate has generally tended to increase in value. It provides long-term growth which creates an excellent store of value.
Real estate can increase in value because the area in which it is located is highly desirable. As the demand for physical land in growing cities and states increases, the supply is limited by the geography. The scarcity of properties creates appreciation in value.
Properties can also appreciate because the income from the property increases through rent escalations. You can also “force” appreciation through improving the property. For example, converting a farm to a housing subdivision or shopping center. You can also improve raw land just by obtaining zoning or development rights.
The reason real estate builds and protects wealth from inflation is that the majority of your larger expenses, like a mortgage stays fixed for a long time. Additionally, with Net Leases the tenants pay the other large expenses. When you combine this with rent increases and property values (due to inflation), you can see how real estate is a fantastic hedge against inflation. Additionally, by borrowing long term debt the real estate investor pays off mortgages with dollars, yen or euros that are worth less than the money borrowed. In essence, it is a hedge against the falling dollar, you can use real estate to transfer money from savers to debtors.
Among the worst performers in the face of inflation are bonds – they provide regular coupon payments and the promise of principal repayment. But as inflation takes hold and the value of a dollar is reduced, so is the value of that bond’s cash stream. That’s why bonds offer the least protection of any major asset class against inflation.
In fact legendary international investor Doug Casey was recently quoted on the Tom Woods Show as saying, “The Bond Market is the real problem. I wouldn’t touch a bond with a ten-foot pole, certainly not a government bond. It’s actually insane that people are buying negative interest rate bonds in Europe, because bonds are a triple threat to your capital today. Why are they a triple threat? Because, 1.) the interest rate risk. 2.) the currency risk. 3.) the default risk. All these governments are bankrupt.”
Real Estate is Tax Efficient and Has Unique Tax Advantages
“The government grants tax and legal incentives to real estate investors to encourage them to do a job that the government can’t.” – Garrett Sutton
Tax Advantages: The United States government and most other governments around the world incentivize investment in commercial real estate and housing because they know real estate investment creates jobs, infrastructure and flourishing communities. When there is no private investment in real estate projects or even disinvestment, communities start to falter, businesses relocate or never start and the tax base crumbles.
Tax Efficient – the government wants investment in commercial real estate so they provide inducements through depreciation and deductions which shelter income from taxation. Real estate investment not only creates wealth for the investor but also creates a halo effect around it of jobs, business formation and housing.
Investing Single-Tenant Net-Leased properties not only provides cash flow, but also typically qualifies for tax advantaged treatment. Typical tax benefits include the ability to deduct normal operating and property expenses before taxable income. In addition, you get to deduct any interest or expenses related to a mortgage on the property. If the property is held for more than one year it qualifies for Capital Gains treatment which is usually taxed at a lower rate.
Additionally, the tax code allows a deduction for depreciation expenses. This depreciation builds up like a running meter and can typically offset a substantial portion of a company’s tax liability.
Commercial real estate is depreciated over 39 years. As an example, when Liberty Real Estate Fund acquires a Walgreens property for $3 million and the value allocated to the land is $600,000. This leaves a building value of $2,400,000 which by dividing this amount by 39 years gives the investors a $61,538.46 depreciation expense per year.
There are other forms of depreciation which savvy real estate operators can use to maximize tax benefits such as Accelerated Depreciation and Bonus Depreciation. To ascertain which types your property can benefit from you should have a professional Cost Segregation Study completed for the property.
There are also Tax Credits available to investors for improving the energy efficiency of a building, investing in alternative energy equipment or even investing in certain areas called Opportunity Zones.
You can also use your Self-Directed Retirement Account to invest in Real Estate.
*Liberty Real Estate Fund LLC does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.
Related Link: How to Utilize Commercial Real Estate for Taxes
Stable – Slow To Rise And Slow To Fall
“Buy land, they’re not making it anymore”. – Mark Twain
Where do you go in the world to obtain a safe haven investment in times of global economic storms?
The stock market can swing wildly with dizzying drops from bad news, rampant speculation or even some crazy tweet. Meanwhile, real estate is less correlated than other retail investment options. Additionally, the illiquid nature of real estate means it can act as a stabilizing force for the rest of your portfolio.
Real estate is a safe haven in times of economic turmoil. Real estate is the safest investment in up and down times because of the consistent cash flow and tax advantages over other investments. A well run business (your tenant) will need their real estate to continue operations, which will require them to pay rent which is cash flow to you the investor. Even if the property loses value, the cash flow continues to pay investors, which is tax advantaged. You can simply outlast the storm, and sale, refinance, during a more desirable market cycle.
Liberty Real Estate Fund invests in Single-Tenant Net-Lease (NNN) properties containing tenants that offer essential services and medical services. Some of these tenants perform stronger during economic turmoil. For example, Dollar Stores usually increase their store revenue during a recession, and provide essential items at a low cost. Generationally, the Baby Boomers are entering into their prime years for medical expenses, which should increase revenue for our medical tenants. The increase in revenue will enhance the tenant’s desirability to renew their lease, and pay more rent to lease the property. Given the desirability and lower cost of the single tenant net leased properties there has historically been a larger pool of investors looking for well performing tenants or 1031 tax exchange buyers needed to identify replacement properties.
Is Real Estate an “Alternative” or the Natural Choice for Investing?
“I would give a thousand furlongs of sea for an acre of barren ground.” – Shakespeare
Like sports teams or politics, everyone has an opinion or advice on investing your money. Banks and Wall Street are part of the giant financial industry pushing you to “deposit” your money and “take a random Walk on Wall Street” or “index” your funds. They even go so far as to classify every other investment, including income producing Real Estate as “Alternative Investments”! Alternative to what? Gambling? Insider dealing? Playing their game?
The result of Wall Street volatility is that the stock market becomes a lottery where the money is made based on speculation and not on solid financial fundamentals.
Real estate is arguably the world’s most important asset class, with a value totaling trillions of dollars, euros, yen, yuan and other currencies.
Real Estate Versus The Stock & Bond Market
How do you avoid market stock market volatility – where one tweet from a president can send your investments crashing? Real Estate is not correlated to what is happening on Wall Street because investing in real estate is investing in Main Street. Real estate has a low correlation with stocks and bonds which makes it a perfect investment vehicle to diversify your portfolio. Real estate has also historically had a high risk-adjusted rate of return relative to stocks and bonds. More significantly, it is an asset class that can decrease volatility and increase returns when added or in lieu of a traditional portfolio consisting of stocks and bonds. Real estate investments have the potential to offer long-term returns that are both healthy and stable.
Below is a chart comparing a commercial real estate investment like Liberty Real Estate Fund I to other financial investments:
You can see that investing in commercial real estate produces “Above Market” returns in a steady, stable and consistent manner. Real Estate has provided higher returns, usually with lower volatility, and has a low correlation to Wall Street.
Be Aware of the Risks
These are the primary benefits of real estate investment. Of course, like any investment, there are risks. The key is to buy smart, manage professionally, and not get over-leveraged.
Real estate investing is typically more hands-on and time-intensive than buying stocks, bonds, precious metals or cryptocurrencies. Unlike other investment options, real estate is a long-term investment and relatively illiquid. This is because the benefits of tangibility come with the downside that it is a fixed asset that cannot be quickly liquidated. Additionally, transaction costs can be high. In essence, know the risks and mitigate as much as possible.
Unlike publicly traded stocks and bonds, real estate investments are usually illiquid. Some may view this as unfavorable, but savvy investors view it as a positive since illiquidity prevents the compulsive buying and selling of assets that contribute to market volatility, as seen in the public markets.
You can always try out commercial real estate investing with the extremely experienced team at Liberty Real Estate Fund which combines the ease of opening a brokerage account and the liquidity provided by Tradable Private Real Estate. Go here to learn more:
“The best time to plant a tree was 20 years ago. The second best time is now.” Time to invest is now. Don’t wait!” – Chinese Proverb
Note: Liberty Real Estate Fund LLC and Liberty Equity Management LLC (collectively LibertyFund.io) have made every attempt to ensure the accuracy and reliability of the information provided. Liberty cannot not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained herein. The information herein is not considered legally-binding legal advice, tax guidance, or financial counsel.
About The Authors
Michael Flight was named the Godfather of Blockchain Real Estate by Forbes Crypto. Michael achieved that distinction by co-founding Liberty Real Estate Fund, the World’s First Net Lease Security Token Fund, creating the Blockchain Real Estate Summit. More recently co-founding Invest On Main (IOM.ai) the Real Estate & Alternative Asset marketplace of the future and AcceleratedLaw a faster, cheaper way to create and tokenize securities offerings!
Michael is a real estate entrepreneur and real estate tokenization pioneer who is an expert in retail real estate investment, redevelopment and real estate on the blockchain. He started his commercial real estate career in 1985, and then co-founded Concordia Realty Corporation in 1990, which continues to partner with some of the world’s most well-known banks, insurance companies, hedge funds and institutional investors in many successful investments.
Jason Ricks, CCIM is a Concordia Equity Partners principal whose primary focus is on acquisitions, leasing, and development. Jason is a native Texan, professional real estate investor and certified commercial investment member (CCIM). Jason’s background in retail leasing and asset management make him an invaluable member of Concordia’s team for developing strategies to unlock the value of a property. Jason also has extensive experience and familiarity with south and southwestern US markets. Jason’s most recent experience is with AMLI Residential as the Vice President for Retail Asset Management where he established and has led the mixed-used Retail Asset Management team working on premier properties worth hundreds of millions across the country. Prior to that, he served as an Asset Manager for BH Properties where he oversaw a 2.2 million square foot value-add retail portfolio throughout Texas and Oklahoma. Jason broke into the commercial real estate business as a Shopping Center broker for Tarantino Properties. He received his BS in Business Management from Oklahoma State University, where he was a Team Captain for the Oklahoma State Football Team (The Cowboys). Jason is an active member of the International Shopping Counsel of Centers (ICSC). Most recently, he was featured in the #1 Amazon bestselling book: DESIRE, DISCIPLINE & DETERMINATION (2019).