If you approached a two-legged stool, would you sit on it? Would you examine it and decide, nope? When you approach a four-legged stool, do you sit down without thinking about it?
Probably so. You might do a little weight test, but generally, the four legs communicate it’s sturdy. One reason to add commercial real estate to your portfolio is that it has four strong advantages––its four legs. Here are the ways the four legs can help you meet your business and investment goals:
1. Cash flow. The way a deal is structured can make a big difference! (Check out Unique Deal Options in the links below 🙂) But you typically want to be in a cash flow position on most properties. A property’s cash flow is the difference between income and expenses. A savvy investor uses that cash to build more cash, making your money work for you.
2. Equity paydown. Income from tenants helps to paydown debt you may have placed on the property. The reduction of principal owed allows the investor to build equity in the property at a faster rate. Overtime, this wealth building can be significant. It’s another way of making your money work for you, rather than you work for it.
3. Depreciation. A critical tool and tax shelter, depreciation allows you to earn revenue, while expensing the in-use portion of CRE. If the property meets the criteria, savvy investors depreciate long-term assets for both tax and accounting purposes.
4. Appreciation. Let’s say you bought a building 20 years ago, and the value and market price increased from what you originally paid for it. By selling at the right time, you enjoy the financial benefit made from accruing appreciation. Maybe it funds your retirement, allows you to travel, takes care of family needs, or––the best option––1031 it for another building. (I’ll discuss 1031 exchanges in an upcoming blog 🙂). Whatever you choose to do, it’s your reward for wise investing.
Some investors may look at one leg as being stronger or more important than another. For me, tax depreciation is more advantageous than cash flow. The market and location also play a role in evaluating the advantages of each leg.
Work with tax professionals that have expertise in the advantages of CRE, talk with experienced investors, and definitely work with brokers who are experts in the field. Having physical assets are a great way to balance your investment portfolio.
In case you want more information, here are some prior investment blogs:
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