Commercial Real Estate Myths EXPOSED #1: Stock Returns Are Higher?

 Stocks have higher returns than commercial real estate? That’s a myth!

Hey everybody. Joseph Gozlan, Your Retail Navigator for the Dallas Fort Worth market, and today we have a new video series talking about myth busting. There’s a lot of myths going on out there around commercial real estate investing, and I’m here to help you sort through what is right, what is wrong, what is my experience, and what is my client’s experience.

So let’s get started. The first myth we’re talking about is that stocks have higher returns than commercial real estate. This usually comes from people that have heavily invested in stocks that probably never look deep into the benefits of other alternative assets. And the most common thing we see is people that have been investing for a shorter period of time.

I don’t usually hear that from somebody that’s been doing investing for the last 30 years, 40 years. So let’s tear this thing apart and really get into what’s the differences between stocks and commercial real estate.

The main misconception is that I look at my stock portfolio, it’s doing 8, 9% every year. Everything is awesome. That’s the average return of the SAP 500, so stocks are doing 8 to 9%, and then commercial real estate, the cap rates are anywhere between 6 and 8%, so it’s lower. So if you’re looking at it from a very simplistic way, yes, 8 or 9% is higher than 6 to 8%, then obviously stocks makes more than commercial real estate, but we have to look at it at a deeper level. What does that mean? Your cash on cash return from a commercial real estate investment is just 1 income stream. Another income stream that happens in commercial real estate, although it might not be visible in your bank account immediately, but that is your principle pay down. Every month you have a mortgage. That mortgage gets paid. A big chunk of it goes to interest rate, but some of it goes towards your principle. If you own a 4 or $5 million shopping center, every month, that mortgage payment is gonna add about 4 to $5,000 into your net worth, just from principal paydown. That’s it. Cash on cash is 1 principle, pay down is 2. Now let’s talk about the third value you get from commercial real estate, and that is the tax benefits.

With commercial real estate, we can use advanced tax tactics in order to enhance our returns. Stuff like cost segregation, leveraging the depreciation, and so on. So if I can get my income from the commercial real estate investment to come into my bank account and then have depreciation and other tax strategies offset all the tax liability, that means that income is gonna be essentially tax free.

Now there’s no tax free before Jasmine DiLucci jumps on my videos on YouTube. It will be taxed at some point, but the leverage of pushing that tax further down the line is huge and it does not exist anywhere else.

Now let’s talk about stocks for a second. Yes. On average, the SAP 500 did between 7 and 10% over the last decade or so, but in reality, if you look at a longer timeframe, you have those ups and downs.

And this is what people forget. If I have a $100 at the stock market and the market took a nosedive, and now I took a loss of 50% on my portfolio. I had a $100. Now I have $50. In order to get back to 0 to the a $100 I had before the market correction.

I’ll need that $50 that I have in my portfolio to gain a 100% from 50 plus 50. That’s a 100% gain. Just to get back to the point I was before the correction. That is a lot to ask from the market.

So those corrections, those ups and downs, while if you look at it from the perspective of an average return, they smooth out. . But if you look at it from the perspective of sequence of returns, there’s a high risk of volatility over there. Let’s say you wanted to retire in 2009 and then the stock market exploded on everybody in the world in 2007 and 8. Then now, your retirement fund looks like half of what it was 2 years ago.

Can you still retire when your retirement fund looks like half? That’s the big difference. That’s what makes stocks a lot more volatile and risky. And while commercial real estate is a lot more stable, even during the crash, the rent were still there. The McDonald’s didn’t stop paying rent. The Starbucks of the world, the Burger King of the world, they didn’t stop paying rent during 2000 7, 8, 9, and so on.

They kept paying rent because they had a contract and they had to continue. You got a lot more stability and you get a lot more. Returns because you don’t have to deal with the volatility of the stock market.

Let’s talk about 1 more critical difference between stocks and commercial real estate, and that is how do you actually enjoy your m1y? When I own a commercial property, I get rent for my tenants. I pay my mortgage. I have cash flow left in my pocket. I can enjoy that cash flow most of the time, either tax free or at a very low tax rate. When I own a stock portfolio, some of those stocks might pay me dividends once a quarter, but in order to do that, I have to be very selective about which companies I own stock of and do they deliver dividends?

It’s not my choice if they deliver the dividend or not. It’s up to the company how they’re doing, what their board of director decided. There’s too many unknowns to the income part, but let’s say I bought an Apple stock 20 years ago for $30 a share, and now Apple stock is upwards in the 200. I made m1y.

No I didn’t. On paper, I made m1y. But if I want to use that to go to the grocery store, if I want to do that, to buy a new car, if I wanna do that, to pay for my kids’ education, I have to sell the stock in order to realize my gain and that’s gonna cost two very bad things.

1, I no longer have an asset. There’s no more $30 apple stocks out there to buy. And then the other bad thing that kinda happens is that as soon as I make that sale, uncle Sam comes knocking and they want their piece. They want 15 to 25% of your gains right there on the spot the same year. On the other hand, if I bought a commercial property 20 years ago and now I have no mortgage or very low mortgage compared to the value, I can refinance my loan. Put a new loan on the property, take all that cash out, and guess what?

It’s tax free because loans are a non-taxable event. So realizing my gains in commercial real estate is a lot easier and safer and tax protected than realizing my gains in stocks. So just to recap, our myth is that stocks have higher returns than commercial real estate, we talked about why that’s wrong. We have multiple streams of income. We have tax efficiency, we have non-taxable events when we refinance and pull the m1y out, and we have a lot more protection against the sequence of returns.

That is a very critical things in stock portfolios. So hopefully this gave you an idea of why we heavily believe, of course, in commercial real estate as investment vehicles.

Personally I put most of my investments in commercial real estate over the stock market, but I hope this helped you understand. This video series is gonna include a few more parts that talks about myths about commercial real estate.

You can click on the link in the description or in the first comment that will take you to our website where you can download the full PDF. That’s it for today. I’m Joseph Gozlan with Eureka Business Group, Your Retail Navigator for the Dallas Fort Worth Market.

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