An Overview Of The Benefits Of Commercial Real Estate Investment
The recent economic recession has been swift and severe
, leaving even the most seasoned investor questioning their ability to make wise decisions. Investments that used to be considered safe and conservative have proven otherwise. However, like most things in life, often times there are rare opportunities to profit if you know where to look.
One of these opportunities may be in real estate. This does not mean you go out and purchase any property that may be available regardless of how good of a deal it may appear to be on the surface. Unless you have unlimited funds available this would concentrate your investments into too few properties.
The better choice is to spread your investment dollars through a real estate development investment company. This allows you spread your investment over a larger number of properties similar to buying a mutual fund to spread your risk of individual stocks. Below are several reasons why this strategy makes good financial sense.
Slow And Steady
The stock market in general can see wild fluctuations on a daily basis. Real estate on the other hand tends to have a more gradual trend either up or down. If you look at past performance and investments conducted through a development company, you'll see this type of investment tends to be more stable. If you compare the volatility of real estate investments to bonds you'll find the standard deviation is 40% lower for real estate. This helps to give you the assurance that real estate can help to provide reliable steady gains without catastrophic losses. Conventional wisdom tells us that large losses are very difficult to recover and therefore you're better off with a real estate development investment firm.
Take Taxes Into Consideration
Taxes should always be a consideration when you make investment decisions. Investments with a real estate investment firm may offer significant tax advantages over your conventional stock market investment. The IRS has provisions for you to reduce your capital gains when you invest in commercial real estate. These provisions allow real estate development investment companies to go beyond typical upgrades to their properties and increase the value of your investment through depreciation. These companies can create tax-deductable expenses that enable sheltering future income from being taxed. Similar to investing through an IRA account, this tax advantage will increase your investment return.
Liquidity
The ability to gain access to your investment dollars should be a major consideration when you explore investment options. If you invested in individual properties, your holding period likely would be many years just to recoup the fixed costs associated with the purchase. In the 1990's your typical holding period may have been as long as 10 years, but this is no longer the case.
It is no longer necessary to commit investment dollars for long periods of time when you invest through a commercial real estate development company. They give the individual investor the power to withdraw funds if necessary. Of course you may experience substantial growth by allowing your funds to compound with the leverage and tax advantages.
Diversification Is The Key
As a general rule of thumb, so far as investments go, something is usually on the rise. This is true even within subsections of an investment class. Real estate tends to be in a class by itself and not directly correlated to the stock and bond markets. An investment in commercial real estate can act as a compliment to your diversification program to help insulate you from wild market fluctuations. Since real estate as an asset class tends to move in long general trends you won't have to worry about the daily market jumps up and down or becoming involved in the bubbles that so often accompany stock market exuberance.
Unstable Times Such As These
As with any investment, past performance is no guarantee to future returns but a historical look at this performance can provide a window of what to expect. Over the past 60 years, commercial real estate has shown a slow and steady upward trend in value. For decades double digit yields have been the norm. The recent downturn in the economy may be just the best opportunity to take advantage of this historical trend.
by: Chris Harmen
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