Friday, January 30, 2009

Why invest in Commercial Real Estate vs the Financial Markets?

According to the Concise Encyclopedia of Economics:



The average compound after-inflation rate of return on stocks from 1802 through 2002 was 6.8 percent per year, and this number has remained remarkably steady over time. A 6.8 percent annual rate of return means that if all dividends are reinvested, the purchasing power of stocks has doubled, on average, every ten years over the past two centuries. This return far exceeds that of other financial assets.



We won't even talk about the returns (or lack there of) in the last six years!



Investment real estate has averaged 6% to 8% capitalization rates (or return on investment if you assume the purchase of a property was for cash and did not involve debt financing). Currently capitalization rates are closer to 8% and this does not include appreciation in the rate of return. If you figure 2% to 4% annual appreciation rates, the returns for investment real estate are in the double digits. Increased cash-on-cash returns can be obtained with some leverage. So investment real estate has better average annual returns than the investment in the financial markets and investment real estate has little chance of going to a value of ZERO, like financial market investments.



I once had someone ask me, "If you can show me how you can guarantee an 8% return on my money and I don't have to be involved in managing a property, I will invest in real estate." Well there is a way to virtually guarantee a return on your investment with very little effort. There are "Triple Net or NNN" investments where the tenant is responsible for all expenses and maintenance of the property and they just send you a rent check each month. These leases typically run from 10 to 30 years. As far as the "guarantee" part, you have to have the confidence in the company that is leasing the property. Confidence is needed that they will stay solvent throughout the length of the lease. So you need to do a little home work on the financial strength, history and market of the company.



One example of such a type of investment is in Dollar General properties. They can be purchased in the $800,000 and up price range with 7% to 8.25% capitalization rates. The lower return may require some owner responsibilities with maintenance versus and absolute NNN lease. This type of retail seems to be recession proof and doing well for people looking to cut expenses in the current economic situation.



For more information about how to invest, questions about terms or more details, please post a reply to this article and I will do my best to provide additional information.



You may say, "this sounds great, but I don't have $800,000 sitting in my checking account right now." Well, look for my next article it will be about how you can use that money that is sitting in your IRA and other retirement plans, earning little to nothing for the last five years. Watch for buying real estate in Self Directed IRA's.



For more Commercial and Investment Real Estate Information, please visit my web site:



http://www.floridacommercialexperts.com/



MAKE IT A GREAT DAY!!

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