What are some of the potential benefits real estate investing can help bring to your portfolio? Here, Stephen Thomas and Scott Bennett, Real Estate Advisory Specialists with Wells Fargo Wealth Management, share their insights.
1. The potential for a steady revenue stream
Thomas recently worked with a trust client who used proceeds from the sale of vacant land in North Carolina to acquire four commercial spaces elsewhere. As a result of this real estate investing, his client is now receiving a steady stream of revenue (primarily from rent) that he wasn’t receiving before. Bond yields are at historic lows, which can make it difficult to generate lower-risk income. Hard assets, including commodities, art, or even a piece of vacant land lack ongoing revenue streams. That’s where investing in commercial real estate may help.
“Income is one of the key components when considering investing in commercial real estate,” says Bennett. “Based on analysis from Wells Fargo Investment Institute from January 2004 through March 2019, the potential return from those investments has been greater over the last couple of decades than what most investors have seen from stocks and bonds.”
2. More potential tax benefits because of tax reform
In the case of Thomas’ trust client, those real estate transactions fell under a series of 1031 exchanges, which allowed deferral of capital gains taxes on the sale by reinvesting in another qualifying property. The Tax Cuts and Jobs Act of 2017 also created the Qualified Opportunity Zone (QOZ) program (learn more about tax reform’s impact on real estate investing). The program allows tax deferment, while Section 199A’s deduction may help reduce taxes for pass-through entities such as S Corps, partnerships, and LLCs, which are typical in commercial real estate investing.
“There have always been potential tax benefits to owning real estate,” Bennett says. “Tax reform made commercial real estate even more attractive from a tax standpoint.”
3. Another way to diversify your portfolio
As you consider any exposure to commercial real estate, both Bennett and Thomas suggest keeping your portfolio diversified by mixing your commercial real estate investments with stocks, bonds, and even real estate investment trusts (also called REITs).
“Today, investors are looking for ways to diversify their portfolios, generate income, and manage their tax burden,” Thomas says. “Real estate investing can help with all of those things.”
Bennett adds: “In my view, stocks, bonds and other traditional investments are priced at healthy levels after 10 years of providing mostly excellent returns. It’s vitally important, always but especially now, to stay diversified,” he says.
One more thing to keep in mind: directly investing in commercial real estate is a strategy that comes with its own set of risk factors. The primary risk is that the underlying asset is illiquid and is not readily traded in the daily market, meaning it may not be as easy to sell an office building, for example, if you need to convert your investment to cash. Added to that is the unpredictability of ongoing costs that can be associated with owning real estate, such as maintenance, capital improvements, and leasing costs for commercial buildings. However, there is potential upside, so be sure to discuss your objective with your wealth professionals before moving ahead.
“In our big picture view,” says Bennett, “adding commercial real estate to your portfolio offers a combination of diversification plus potential for income, appreciation, and total return.”