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. Combined with increased volatility, the stock market offers investors minimal monthly cash flow and minimal, if any, tax advantages. Though the stock market is considered the logical and easy thing to do, there are additional avenues to gain return on your capital.

Commercial real estate has been more stable than the stock market during the past few years, and has consistently produced higher returns.

Source: Marcus & Millichap

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

1. 1. Ownership

Generally passive investors are owners of the property and are entitled to a percentage of any refinance or resale of the property.

1. 2. Cash flow

Passive investors are entitled to a portion of the cash flow, allowing them to put their money to work in real estate without exerting the effort required by a sponsor. With the stock market, some stocks offer dividends, though even those are minimal.

1. 3. Tax benefits

Passive investors should always consult their tax professionals, and while it depends on the structure of the deal, passive investors sometimes are entitled to tax benefits as the owner of the property. These tax benefits can include: depreciation and reducing tax burdens. 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. 4. Leverage

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. 5. Less Sensitive to Volatility

Real estate values, particularly commercial real estate values, are less sensitive to economic volatility than the stock market or other investments. Real estate is often referred to as a “get rich slow” investment, so short-term economic instability will have less impact on real estate.

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. 6. Hedge Against Inflation

During inflationary times, rents and property values increase. This is logical because the more money an individual is earning, the more that individual will spend to purchase a property or rent an apartment or storage space. Investing in larger commercial deals gives a passive investor a solid hedge against inflation by investing, at a large scale, in real estate.

1. 7. 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.

In these volatile times, spend time to consider whether the path that “everybody takes” – investing in the stock market – is right for you.