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The Facts About Recession-Resistant Real Estate
All commercial real estate is cyclical. Historically, some property types have values that tend to correlate with overall economic conditions more so than others. Retail and office properties for example have been known to take a hit during economic downturns. During the Great Recession and its aftermath, apartments became a hot investment ticket, while single-family housing values plummeted.
Capital Preservation and Real Estate Investing
When the term “investment,” is tossed around, the assumption generally focuses on some kind of asset that generates a reasonable rate of return, relative to the monies invested and potential appreciation when the investment is ultimately sold. However, there are some investments out there where return on investment is not the primary objective. These types of investments may be referred to as “defensive” investments where the primary investment objective is preservation of funds. Their goal, as part of an intelligent portfolio investment strategy, is to protect invested capital.
The Rewards - And Risks - Of Single-Family Home Investments
According to the National Association of Realtors (NAR), pending home sales fell in May 2017. This could seem to be dismal news on the surface. But, according to the article, sales fell, not due to lack of demand, but because of too much demand, combined with a shrinking housing supply. This is nearly a 180-degree flip from a little less than a decade ago. At that time, home sales suffered because of too much supply, little demand, and frozen capital.
Real Estate As An Inflation Hedge
Inflation, from an economic standpoint, can be defined as a prolonged increase in prices of goods and services. If inflation rises faster than your income or value of your assets, in effect, you are losing ground on your purchasing power or real (inflation adjusted) net worth. It’s no wonder that savvy investors are concerned with inflation and turn to real estate as an important piece of their investment portfolio.
Benefits of Real Estate Investing
According to a Morgan Stanley Wealth Management Investor Pulse (December 2013) survey of 300 millionaires, 77 percent indicated they owned real estate as an alternative investment – more than double the next closest choice of alternative investments.¹ With so many investment options these days, real estate remains the investment of choice for several reasons:
Four Ways Real Estate May Build Wealth
You’ve probably seen the late-night infomercials, reality TV shows and get-rich-quick books on real estate investing. Most focus on buying properties for peanuts, making a few minor cosmetic upgrades and flipping the property for big bucks. Unfortunately, for the average investor, it seldom works this way.
Pros And Cons Of Various Property Types
Although most commercial real estate properties have the ability to produce income, the strengths and risks in their potential cash flows differ by type of property. Traditional commercial property types are generally considered to consist of multifamily, retail, office and industrial, however, several other property types are becoming more accepted by investors. Let’s take a quick look at different investment property types along with their relative pros and cons. It should be noted that this post is a generalization and that all properties are subject to asset-specific traits.
How Does A Mortgage Affect Real Estate Investor Returns
Commercial real estate is a relatively high dollar asset class, with even “small” properties costing hundreds of thousands of dollars. This is why investors almost always finance a portion of the purchase with a mortgage. Mortgages enables investors to acquire larger properties, but how else does it impact an investment? By way of example, let’s look at the impact of debt on the cash flow, principal reduction and appreciation of hypothetical investment properties.
How to Determine Cash Flow
While talking about a real estate investment the other day, I fielded the question: “What is cash flow in real estate?” It's a great question. No doubt, one of the hallmarks of investing in real estate is the ability to generate current cash flow. When I began explaining the concept, it dawned on me that there are several definitions for the term in real estate, depending on who is asking and answering the question. So in this post, I’ll dig into a few ways it can be calculated, and how real estate investors use it to evaluate potential real estate investments.
What is a Cap Rate?
In commercial real estate, a property’s capitalization rate, or "cap rate" is used by investors to understand the relationship between the price or value of the property and the net operating income it produces. It's a mere rule of thumb used by investors to compare different real estate investments, much the same way the price/earning (P/E) ratio is used to compare stocks.
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