Commercial Real Estate vs. the Stock Market

Stock market volatility has left many questioning whether trusting their capital in the stock market is the right decision. While the stock market offers potential gains, its volatility, coupled with minimal monthly cash flow and tax advantages, prompts investors to explore alternative avenues for capital growth.

Commercial real estate emerges as a stable and lucrative option in comparison to the stock market. Over recent years, it has demonstrated resilience and consistently delivered higher returns.

Even passive real estate investors can take advantage of the benefits of being a commercial real estate owner. Some of those benefits include:

1. Ownership

Picture yourself as a co-owner of a lucrative property. When the time comes for a property refinance or sale, you'll be in for a slice of the pie.

1. Cash Flow

Unlike stocks, which may offer minimal dividends, commercial real estate passive investors enjoy a steady stream of cash flow, allowing them to leverage their money without active involvement.

1. Tax Benefits

Real estate ownership often comes with tax advantages like depreciation, reducing the overall tax burden compared to stock market investments, which may trigger taxable events upon selling. With the stock market, an investor usually creates a taxable event when they sell a stock and collect cash, with few, if any, tax advantages.

1. Leverage

Unlike the stock market, where your investment is directly proportional to your capital, real estate offers leverage. With financing from banks covering a significant chunk of the property cost, your investment potential skyrockets. If an investor wants to purchase $100,000 worth of a stock, it costs $100,000. In commercial real estate, if an investor wants to purchase a $500,000 property it will likely cost the same $100,000 because a bank will likely finance 70-80% of the purchase.

1. Less Sensitive to Volatility

Commercial real estate values, particularly in sectors like self-storage and multifamily, are less prone to economic volatility, offering a more secure investment option.

In fact, certain real estate classes, like self-storage and multifamily, outperformed during the Great Recession. From 2008 to 2012, the major publicly traded self-storage companies - CubeSmart, Public Storage, Extra Space Storage, and Life Storage - saw a brief share price decline in 2008 before soaring the following three years. Not only did commercial real estate assets like self-storage outperform the market during the Great Recession, they increased in value dramatically.

1. Hedge Against Inflation

Remember the Great Recession? While stocks trembled, certain real estate sectors like self-storage and multifamily thrived, not just weathering the storm but flourishing amidst the chaos. Real estate investments provide a hedge against inflation, as rents and property values tend to rise during inflationary periods, preserving the investor's purchasing power.

1. Forced Appreciation

Smaller residential properties are valued based on comparable properties in the market, while larger commercial properties are valued based on their net operating income. An owner can force appreciation by raising rents or reducing expenses, thereby forcing appreciation to the property. By tweaking rents or trimming expenses, owners can nudge property appreciation, enhancing returns without breaking a sweat.

In uncertain times, it's worth considering whether the traditional path of stock market investing is truly the best fit for your financial goals. Commercial real estate offers a compelling alternative, providing stability, income, and potential for long-term growth.