5 Ways to Wring More Value From CRE

ORLANDO—Commercial real estate is the one investment category that every individual must use in some form or fashion in his or her lifetime. So says Gary Carmell, president of CWS Capital Partners and author of the new book, The Philosophical Investor: Transforming Wisdom into Wealth.

“Whether as a place to live, an office to work in, a store to shop in, or a place to store some of our larger possessions, real estate will always be in demand,” Carmell tells GlobeSt.com. “This has historically made real estate a very good way to store, preserve, and grow wealth.”

Carmell says this is the case for strategically-located properties that are well-maintained, because real estate is typically a byproduct of economic and demographic factors. The United States, particularly in dynamic cities with a well-educated workforce, he says, is able to innovate and grow over the long term, despite periodic setbacks.

Real estate naturally benefits from this growth. Carmell offers are five ways to find the most value:

1. You Value Illiquidity: Illiquid investments have a better potential to allow one's capital to compound by having it invested longer in strong real estate investments with durable cash flows that the sponsor controls.

2. Tax Benefits: Real estate can be an excellent estate-planning tool. Distributions made over the years, along with depreciation deductions, build up an increasing potential tax liability when it comes to time to sell. This makes using the 1031 exchange a very powerful and attractive wealth-preservation vehicle.

3. Leveragable Asset Class: Most commercial real estate loans are nonrecourse, meaning there is no liability to the borrowers for repaying the loans, provided no illegal acts were carried out that would result in a loss to the lender. The lender can only look to the collateral of the property or other pledges made by the general partner or affiliate. The purchase of a larger property using borrowed money allows for more depreciable assets per dollar investment, thereby providing more shelter of one's distributions from immediate taxation. The right lender and loan structure, however, can allow for the advance of this additional capital.

4. Yield-oriented Investment: Real estate is typically purchased to generate current dividends that are typically higher than what is available in the stock or bond markets. This is the case because most properties are limited in terms of expanding their capacity to generate more revenue in any way other than by raising rents. It is rare that more units can be created. Given this, real estate investors tend to want approximately half of their total return to come from dividends and the rest from capital appreciation.

5. Tangible Asset: Owning property is obviously tangible and is unique because of the owner's ability to improve upon it and add value.

Stay tuned for part two of this article.