Risk/Return Profile for Commercial Real Estate – Is this the best investment?
Catchy title, eh? We at Bonne Capital certainly think real estate is one of the best, if not the best, place to put your money and let it go to work for you. Maybe you’ve always considered investing in real estate, but your neighbor told you it’s risky and you’ll have to unclog toilets in the middle of the night. I agree, that would suck. But, we’re commercial real estate investors with professional property management in place. I don’t unclog toilets, nor do I get phone calls from tenants as they don’t have my phone #.
Back to my main point, is it risky? Should you just throw your money at the stock market since that’s what the masses do? If you’ve had success in the equities market and enjoy investing there, keep doing that.
However, if the daily volatility of the market worries you and you’re looking for investments with some more stability, then let’s look at commercial real estate.
The Case for Real Estate
First point: no investment comes without some degree of risk. If you want and expect a return, you’ll have to get comfortable with some sort of risk. If you’re looking for a guaranteed way not to lose money, there isn’t one. Even keeping your money in a savings account or under a mattress is a way to lose money, as inflation % is outpacing savings accounts.
Commercial Real Estate has a phenomenal long-term track record of generating the best risk-adjusted returns of all asset classes, making the decision to buy today and hold on, watching your money grow over the long term.
The following is a chart from Thomson Reuters, showing the return to risk profile of major asset classes over a 20 year span.
Core Commercial Real Estate has the second lowest risk, yet the highest return. This is powerful and shouldn’t be overlooked.
Another measure of risk-adjusted returns is the Sharpe Ratio. You want to get the highest returns per unit of risk. Below is a graph showing Sharpe Ratios from various asset classes.
From this chart, we can see that the multifamily Sharpe Ratio is 5.2 times better than the S&P 500 for the periods analyzed. Pretty eye-opening stuff, wouldn’t you agree?
And finally, another chart worth looking at is the one below from J.P. Morgan Asset Management. It gives us a recent 20-year period of annualized returns by asset classes.
Again, you see commercial real estate (REITS in this example) with the highest annualized return over a 20-year period. And this is REITS, this isn’t private placement real estate syndications which are superior to REITS in terms of returns, taxes, and direct ownership.
An operator we partner with, Joe Fairless of Ashcroft Capital, wrote a fantastic article about Apartment Syndications vs. REITS, and which is the better passive investment. I would highly recommend you check it out here.
In conclusion, we’ve discussed that real estate has the second lowest risk and the highest returns across numerous asset classes over the last 20 years. Based on the Sharpe Ratio, multifamily is 5.2 times better than the S&P 500. We did not take into account the additional benefits of investing in real estate such as depreciation creating tax efficient income.
So, is real estate an elite investment strategy? I’d say it is, would you agree? I know 90%+ of the worlds millionaires certainly would.