Commercial real estate investment is not without risk, which is why I explain during my real estate training courses the need for hedging commercial real estate to reduce that risk. It is important to remember when investing in any type of real estate that many variables can pose a risk to your investment.
Property values can drop, interest rates can rise, and tenants can move out, all of which can affect the investment. For this reason, hedging commercial real estate is the best way to protect the investor.
What is Hedging?
Consider hedging as a form of insurance. Hedging protects investors against potential losses. Hedging offers a kind of insurance against negative events. Although hedging does not eliminate negative events, it reduces the investor’s risk should a negative event occur. In fact, many investment advisers recommend that clients use commercial real estate investments as a way to hedge their other investments.
Diversify
One of the best ways to hedge commercial real estate is for investors to diversify their commercial real estate investment portfolios. As the economy changes, so does the need for certain types of commercial real estate. The downturn in the housing market created a need for multi-family dwellings, such as duplexes and apartments, while higher unemployment rates reduce the need for office space as companies downsize. On the other hand, when housing markets improve, there may be less need for multi-family units and a rise in unemployment rates may create a demand for office space. These examples explain how diversifying commercial real estate investments offer protection during uncertain economic times.
Trophy Properties vs. Distressed Properties
Understanding the difference between trophy properties and distressed properties is another way to hedge commercial real estate. Trophy properties often are located in upper scale, highly coveted areas, and normally offer higher rents from tenants. Distressed properties, on the other hand, may be found in lower income areas or be in need of some repairs and maintenance. Rents in distressed properties are normally lower. The fact is, distressed properties are showing a higher rate of return than trophy properties as cities attempt to revitalize distressed areas. Therefore, it is important to invest in a combination of trophy and distressed properties to protect against market fluctuations.
In my real estate training courses, I teach students the best ways to hedge commercial investment properties. For more information on hedging commercial real estate investments or regarding my real estate training courses, connect with me in my online communities on Facebook, Twitter and YouTube.