Handbook of Finance: Financial Markets and Instruments

Chapter 48. Investing in Commercial Real Estate for Individual Investors

G. TIMOTHY HAIGHT, DBA

President, Menlo College and Chair of the Board, Board of Commonwealth Business Bank (Los Angeles)

DANIEL D. SINGER, PhD

Professor of Finance, Towson University

Abstract: Commercial real estate is seen as providing an attractive alternative to investing strictly in stocks and bonds. Even though commercial real estate values can be volatile their addition to an investor's portfolio of assets will reduce risk without necessarily compromising return. In fact, the advantages of personal control, financial leverage, tax shields, and an inflation hedge promise to increase the returns available to investors in commercial real estate. To be successful, commercial real estate investors must take consideration of the location, type of commercial real estate, and the stage of the local commercial real estate cycle. The greatest risk to investors of well-chosen commercial real estate is a lack of liquidity, but this problem can be minimized through the ability to successfully manage long-term compounding cash flows. The returns and risks to the commercial real estate investor are found to be sensitive to the organizational form in which the property is held. While the advantages and disadvantages of various organizational forms are considered, particular attention is paid to the limited liability company as being the vehicle of choice for most commercial real estate investors.

Keywords: location, diversification, ...