Asset Allocation and Commercial Real Estate

March 22, 2011

Diversification is fundamental to good financial planning and that means allocating your assets among several asset classes that are not closely correlated. One year gold performs well and stocks do poorly. Another year bonds do well and oil does poorly.

Commercial real estate investment can play an important role in your investment portfolio by balancing income and growth characteristics. There are five important benefits that commercial real estate can bring to you investment portfolio:

INCOME is generated from leases to tenants such as businesses and retail stores. Once the expenses of operations are paid and the mortgage, there should be positive cash flow to the owner.

DEPRECIATOIN is a tax write-off of some or all of your income that reduces your taxable income.

EQUITY BUILD-UP takes place as your mortgage balance is reduced. Your tenants pay down your loan for you.

APPRECIATION grows as rental income goes up, as the market puts a higher value on your income stream and as the value of the land goes up. Commercial property is your best hedge against inflation as you can raise rents as inflation goes up.

LEVERAGE means you can borrow a substantial amount of your purchase price to buy the property. You can control a large property for a small percentage of the value. For example, you buy a property for $4 – $1 of your own and $3 you borrow. Then the property goes up in value to $5 and you sell it. You pay off the $3 you borrowed and you have $2 left over. You doubled your money when the property went up 25% in value.

These five elements can be remembered by the acronym IDEAL. Commercial property may be the ideal solution for your asset allocation problem.

Ad published in the San Antonio Business Journal March 12,2011 issue – Pg. 12.