10 Ways Commercial Real Estate Can Add Value to Your Portfolio

The high cost of entry and higher level of necessary knowledge to both underwrite and manage a commercial real estate (CRE) property means it's often reserved for more experienced investors at an institutional level.

But thanks to real estate investment trusts (REITs), a special type of stock that invests in CRE, everyday investors can now easily invest in CRE. Here are 10 ways CRE can add value to your portfolio.

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Diversification is hugely important for minimizing risk in a portfolio. There are over a dozen types of commercial property available to invest in, including self-storage facilities, retail centers, industrial buildings, apartment and mobile home communities, hotels, entertainment venues, and office buildings, among many others.

By investing in different types of CRE -- or even a diversified REIT that owns multiple property types -- you can reduce your exposure to a single industry, hedging against challenges in the market if there is a correction or slowdown.

ALSO READ: Understanding Portfolio Diversification

Asset diversification isn't the only way to hedge risk with CRE. Most commercial portfolios are spread across different markets. This is a major benefit because it allows the company to maintain a steady performance or benefit from higher demand in certain markets.

The Sun Belt, for example, is red-hot right now for most commercial industries. REITs with exposure to this market are seeing accelerated growth because of it when compared to others.

Aside from residential housing and self-storage facilities, most CRE operates on long-term net leases. These leases lock tenants in for anywhere from five to 20 years and pass key responsibilities -- like repairs, renovations, property taxes, utilities, and insurance -- onto the tenant.

This reduces expenses and ongoing management, plus most leases have incremental increases to adjust for inflation.

ALSO READ: Will Net Lease REITs Survive Inflation?

CRE benefits from economies of scale, which is reduced expenses and management fees for it being done at scale.

An on-site property manager at a multifamily apartment complex streamlines the rental collection process. They can also make things like leasing to tenants or coordinating repairs much easier than having one property manager drive to 20 different single-family rental homes.

Most CRE benefits from multiple income streams being generated from a single property. This can be extremely helpful in maintaining steady revenues despite vacancies, which is an invertible part of owning real estate. In a single-family rental, if the property is vacant, it isn't generating money until a new tenant moves in. But with CRE, that's not the case.

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CRE can hedge against inflation in two key ways -- by raising rents and rising in value. Most leases, even long-term net leases, include incremental raises in rent. In a normal inflationary environment, this more than offsets the inflation rate. It also has the benefit of being a hard asset that can increase in value due to appreciation, demand, and inflation.

ALSO READ: Inflation Just Smacked the Stock Market Again. What Can Investors Do?

Real estate as a whole benefits from leverage, or having the ability to purchase a property by putting only a fraction of the purchase price down as an investment. This increases your chance of earning a higher return because there was a smaller cost of capital invested. But it can also be used to grow the portfolio further.

The revenues or value generated from one building can be leveraged to buy another property, increasing the number of assets owned and income earned, without extra money being required to do so. The power of leverage is one of the key building blocks for REITs to grow.

REITs have historically outperformed the S&P 500 over the last 20 to 25 years. Equity REITs, in particular, which earn money from leasing physical real estate, have provided superior returns to the S&P 500 with the added benefit of paying dividends.

ALSO READ: REITs vs. Stocks: What Does The Data Say?

CRE's earning opportunities aren't limited to leasing only its primary real estate. Ancillary income can be generated from many properties through things like storage space, parking, laundry, or even by creating retail space below offices or multifamily units. This diversity of income streams can help increase revenues for the company.

Thanks to CRE's earning opportunities, which come from multiple income streams, and a REIT's unique structure that requires it to pay 90% or more of its taxable income as dividends, the money earned from CRE is a super-reliable REIT investment. It's also higher than other dividend stocks, meaning investors can receive superior returns without having extra risk.

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Thanks to new investment opportunities like REITs and even crowdfunding, it's never been easier to invest in CRE and reap some of the benefits it can bring to a portfolio. Market volatility has put a number of great REITs on sale, making right now an excellent time to get started.

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