At a Glance —
- A balanced portfolio is vital to both protect, and grow, wealth. Illiquid investments can be a smart choice to help investors achieve that balance
- Illiquid investments may provide stability in many market conditions as well as they offer considerable protection — unlike other investment options, they are backed by real assets
- These types of assets are typically not as easily bought nor sold and they generally require a considerably longer investment horizon. Markets for illiquid investments are not as well established as the more traditional options of stocks and bonds
- Commercial real estate (CRE) is a prime example of an illiquid investment that can be a high performing addition to your investment portfolio
- There are numerous additional benefits of CRE investments to further bolster their appeal to investors
Investment portfolios can benefit significantly from a healthy mix of both liquid and illiquid investments. Illiquid investments are those which you may not be able to sell easily. Real estate, artwork and antiques are all examples of illiquid investments which may be difficult to sell quickly. These illiquid assets are generally expensive and the process of locating interested buyers and selling the asset may take a long time.
Let’s focus on commercial real estate (CRE) as an illiquid asset option.
Commercial real estate refers to properties used for business purposes, such as office buildings, shopping centers, and apartment buildings. Unlike residential real estate, commercial real estate generally has a longer lease term, making it a more stable and predictable source of income for investors. Additionally, commercial real estate has a lower correlation with market movements than other investment options do, helping to provide portfolio diversification and reducing overall risk.
Offsetting the fact that most CRE investments are illiquid, there are numerous benefits beyond providing balance to your portfolio. Those benefits include —
- The investment is backed by real assets — buildings and land — with the strong likelihood of appreciation
- CRE investments typically generate cash flow income
- CRE investors can leverage tax benefits throughout the life of the investment
Commercial real estate is a tangible asset, providing investors with a physical representation of their investment. Unlike stocks which are subject to market fluctuations, commercial real estate tends to be more stable and historically is less likely to be impacted by market volatility. This provides investors with a sense of security, knowing that their investment is backed by real physical assets in the form of buildings and land.
A significant advantage of commercial real estate is its potential for appreciation. CRE properties generally increase in value over time, as the demand grows and property values increase. This provides investors with a source of capital appreciation. CRE tends also to counteract the effects of inflation — as new construction prices rise, existing CRE properties tend to benefit, increasing in value as well.
Another benefit of commercial real estate is its ability to generate income in the form of rent. Unlike stocks, which only pay dividends, commercial real estate investments typically provide a steady stream of income throughout the holding period.
Finally, commercial real estate offers investors a source of tax deductions. CRE investors can benefit from their share of the depreciation on the CRE property during the investment holding period. This can help reduce an investor’s overall tax obligation. Read more about the benefits of depreciation for CRE investors here.
Bottom line —
Illiquid investments are an important consideration for every investor — they help balance and diversify your investments and help protect and grow your wealth. The holding period for illiquid investments as well as the buying and selling process is longer and more complex than traditional markets. Commercial real estate is an illiquid investment option which offers a wealth of additional benefits for investors.
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