Owning preferred real estate investments can provide many benefits for investors, such as higher returns, tax advantages, inflation hedging, and diversification. However, there are also risks involved that need to be considered carefully when making investment decisions in the real estate market. This article will analyze the pros and cons of owning preferred properties as an investment strategy.
Higher returns from preferred properties
Preferred properties, such as commercial buildings, warehouses, apartment complexes, tend to generate higher returns compared to average properties. Factors like location, amenities, tenant demand allow owners to charge higher rents and sell at higher valuations during uptrends in the real estate market. However, the same factors also make these properties more vulnerable to downturns.
Tax benefits for real estate investors
Real estate investment provides tax advantages that are not available in other asset classes. Depreciation deductions, lower capital gain taxes, and the ability to defer taxes through 1031 exchanges help improve after-tax returns for property investors. High net worth individuals can even use preferred properties to potentially reduce estate and gift taxes.
Inflation hedge with real assets
Preferred commercial and residential properties have historically been considered an effective inflation hedge as they provide hard assets and the ability to adjust rents over time. However, during periods of low inflation or deflation, their value may not keep pace with or outperform other assets.
Diversification for balanced portfolios
Adding preferred real estate to an investment portfolio provides diversification from stocks and bonds. While diversification itself does not guarantee higher returns, balanced portfolios have demonstrated the ability to improve risk-adjusted returns over long periods of time.
In summary, preferred real estate investments offer many potential advantages but also have their own set of risks. Investors should carefully assess their investment goals, time horizon, tax situation, risk tolerance as part of determining if these type of properties have a place in their portfolio.