Top 5 Benefits of Owning Investment Properties for Business Owners and Entrepreneurs
Steve Nabity
October 16, 2024
Top 5 Benefits of Owning Investment Properties for Business Owners and Entrepreneurs
You may have heard of business owners and entrepreneurs investing in high-rise condos. They might have done so with the intent of elevating their wealth to “lofty” levels. Some business owners invest in real estate to ensure that their portfolios have a “solid foundation”. Some adventurous entrepreneurs might even buy a haunted house for investment because they probably heard of a “spooky” good deal with “ghost” income potential.
We won’t advocate buying haunted houses, but what we will highlight in this article are the top benefits for business owners and entrepreneurs of investing in real estate. More specifically, we will look at tax benefits, the role of real estate in portfolio diversification, the cash flow generating ability, the potential for capital appreciation, and some more aspects of the real estate asset class.
1.Maximize Your Tax Benefits
The more wealth you create, the more significant the tax outgo. If the annual income is in the millions, taxes might also be north of a million dollars. Thus, tax planning can lead to substantial savings. Investing wealth in asset classes that offer tax benefits is one way not just to manage a portfolio, but also save on tax expenses and enhance net returns.
The tax benefits of investment in real estate are multifold. One can deduct certain expenses related to investment properties from the income generated by such properties. These include interest expenses if there is a mortgage, depreciation expenses, and certain operating expenses.
Real estate investing also allows you to defer paying capital gain tax. Under the 1031 exchange provision, one can defer paying capital gains tax arising from the sale of a property provided that the proceeds from such a sale are reinvested in a “like-kind” property within 45 days.
Skyline Point Capital has invested in properties financed with a mortgage and has also made use of depreciation as well as other operating expenses to optimize tax expenses. Our investments include multifamily properties in Nebraska, Texas, and Nashville, TN. All of our investors in these deals enjoy the tax benefits that we have discussed. Skyline Point Capital also offers 1031 exchange opportunities to qualified investors.
2.Build Your Diversified Real Estate Portfolio
Diversification in investment is done to spread out risk across various asset classes rather than build a large exposure to a single or few asset classes. Having concentrated exposure to a single asset class can leave your portfolio vulnerable to unexpected events.
For example, if you invested a large chunk of your wealth in something like Silicon Valley Bank stock then you would have seen a massive drawdown when things went south. However, if you had some investments in gold, some in multifamily real estate, etc. then the impact of that event would have been limited on your overall portfolio. Sure, your investment in Silicon Valley Bank (or bank stocks at that time) might have still suffered, but the risk to the portfolio would have been better managed.
You can earn better risk-adjusted returns by investing in various asset classes and subclasses. For example, if you invest in real estate, it may be a good idea to diversify geographically and invest in industrial, medical, and retail properties. That way, if the retail segment gets hit due to an economic downturn, you still have multifamily working for you. The idea is to create a portfolio of assets that have low correlation to one another.
In investing, it is said that managing risk is more important than focusing only on returns. If you learn how to manage the risk, then the returns will take care of themselves. Positioning a portfolio to have enough of a buffer against market volatility is what diversification is all about.
3.Generate Steady Cash Flow
Real estate can provide returns through regular rental income as well as through capital appreciation. The most direct source of cash flow from a property is rental income. As long as tenants pay their rent on time (at least most of them), then a property owner will receive regular cash flow. If the owner of the property is an entrepreneur or a business owner, then he/she can use that cash flow for his/her business needs. Such needs could be regular working capital or capital expenditures to grow the business.
The great thing about well-performing cash flow properties is that their income levels tend to keep up with inflation. As the cost of living rises, so does the rent. Properties are valued based on the capitalization rate (net operating income divided by the value of the property). So, if the net income generated by the property goes up, so does its value. Over time, this can lead to capital appreciation.
If the property investment is financed with a mortgage, then by making regular mortgage payments, the investor progressively increases his/her equity in the property. So, over time, there are two benefits for the property investor – capital appreciation and equity.
(Southport Center, LaVista NE)
4.Great Appreciation Potential
We touched upon capital appreciation when investing in real estate. Let us explore the topic in more detail. Real estate tends to grow in value over time. Some say that it is because nobody is making any more land while the population keeps growing. Some believe that real estate is a hedge against inflation and keeps increasing in value to keep up with inflation. Whatever the reason, there is no doubt that the real estate asset class offers the benefit of capital appreciation provided that the investment is done right.
Certain properties may appreciate more than others. Locations that are highly desirable among the working population and where the supply is limited can potentially experience strong capital appreciation. The increasing value of real estate makes it a good investment vehicle for gradually building up long-term wealth.
Buying a property and then upgrading it can increase its rental income. An increased income can then lead to an enhancement in the property’s value. So, investors often purchase properties with the goal of improving their appeal and quality which can then attract tenants who are willing to pay higher for an improved living experience. All of this eventually contributes to capital appreciation over the hold period of the investment.
Skyline Point Capital is particularly proactive about enhancing the appeal of our portfolio properties through improvements and renovations. We often purchase Class B or even Class C properties that have multiple opportunities for upgrades. Examples of such upgrades include new flooring, new appliances, introducing value-add services like trash pickup or reserved parking, etc. The upfront cost of such upgrades is recovered through higher rents post the improvement. Our investors also enjoy enhanced returns as a result.
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5.Opportunities in Real Estate Development
Real estate presents investors with the opportunity to earn financial returns while also shaping local communities. Is real estate a good investment? It certainly offers both regular cash flow and capital appreciation. It can help diversify a portfolio and provide tax benefits. Is real estate a good business? It can be if done right. There are several investors who simply buy and hold properties. There are several who buy, add some renovations, and then sell. Then there are some who engage in real estate development.
The opportunities in real estate development are quite extensive. Investors can purchase land and then construct real estate on it. They can also purchase existing properties, pull them down, and build something new. Once the new property is developed, it can either be sold or rented out. Some real estate takes more time and investment than others to develop. For example, office or retail can take a lot of upfront investment. But the leases are also longer.
Some investors also specialize in mixed-use development which involves a commercial and a residential component in the same property. While Skyline Point Capital does not take up development projects, it does invest in existing properties with the goal of improving them. In the past, our deals have involved making light renovations, doing major upgrade work, and simply buying and holding. Our goal with all our investments is to increase the income that the property can generate.
Conclusion
We have covered some of the most important benefits that business owners and entrepreneurs can enjoy by investing in real estate. We talked about optimizing taxes through real estate, we touched upon the topic of portfolio and risk management through diversification, and we also discussed how real estate can generate steady cash flow and capital appreciation.
We also listed some properties from our portfolio and shared how Skyline Point Capital goes about harnessing the benefits of real estate investing. We are passionate about investing in a variety of real estate and generating alpha for our investors. We highly encourage you to check out the plethora of complementary learning resources, including e-books and podcasts, that are available on our website. The first step to getting started with your real estate investing journey is to learn more about the topic. You can also reach out to us and schedule an introductory call to ask us anything about real estate, investing, or anything else on your mind.
Lastly, we recommend that you join The Founders Investor Club and get regular access to institutional-grade real estate investing opportunities. This is not some list of deals but rather live opportunities that have been vetted by our team and that we are looking to invest in.