Saturday, March 30, 2013

Investing in Real Estate 102


If you've spent any time looking at real estate—even on the internet, you've found there are at least two different types of properties, residential and commercial. Residential is comprised of houses, condos, duplexes, apartments and so on. Both of these types of properties took a haircut during the last recession—they were all a part of the bubble and they all profited from the lift in the market price of properties.

Today, residential properties are selling at a great rate, and although many are being bought by investment groups, most are being purchased by people who expect to live in them. And they’re buying for cash. Because the prices are affordable right now, a cash deal relieves a buyer of having a mortgage payment as they get by on Social Security and fixed incomes.

Sometimes an all cash transaction happens because the buyers are “from away”. If you are a Canadian, for example, don't bother trying to get a mortgage in Florida. You get your loan in Canada, and bring the check to the closing table here—meaning, even if you have to get a loan (perhaps a home equity loan on your Toronto residence), when you use the proceeds here to buy the beach front house on Manasota Key, we will see it as a cash deal.

But let's talk about commercial real estate. This is the investment arm of the real estate market. Oh I know people say they have invested in a home and it will probably grow faster than the stock market. But really they have not invested, they are speculating on residential real estate. If you don't think so talk to all the folks who bought “investment homes” over the last 5 years. Speculation really is a “fingers-crossed” investment, and works out about 50% of the time.

Obviously commercial properties are not residences. They are the doctor's offices and the retail stores up and down Main street, the warehouses a couple of blocks back and the malls and hotels and golf courses, and all the vacant lots that are zoned commercial which one day may become a McDonald's or a Walgreen's.

The barrier to entry in this type of investment is higher than residential, the cost of entry is usually substantial. But the market is less fickle and there's nothing like a good lease from a well known tenant. Back in the day, the best investments were Kmart leases. These were paying a significant annual profit, your investment would be pooled with other investors and as a group you would participate in a limited partnership to buy one or more buildings, and then rent them to Kmart. Sometimes these were called purchase, lease-back deals and you could make 15% maybe 20% on your money. True investments come with a known--or at least projected--rate of Return On Investment (ROI). Even today I know one investor who owns 6 United States Post Offices. Love them or hate them, they pay the rent on time.

And one of the interesting things about Commercial vs. Residential is the two markets tend to peak at different times, almost as though when one is up, the other is down and vice versa. Residential real estate began it's slow recovery about 3 years ago, (really when it seemed it could go down no further), and it's been climbing back ever since. If you had to sell during that time, I'm sorry. The good news on residential is it has another 2-3 years to grow, some say 5 years still to grow.

But if you didn't have to sell then, now is the time to rethink your real estate portfolio. Take a clue from the big builders who are constructing homes all over the counties, with the knowledge that there are buyers, and there will be buyers in the future. Even when the final blip of the phantom inventory hits the market, (which will be in direct competition with their new homes), the new ones will be selling.

But back to commercial, things are just now turning around for commercial. Buyers are stepping forward, and vacant buildings are being gobbled up. As a landlord of a prime commercial property, you should be able to expect a net net net lease with a 20 year duration that will have escalator clauses so that you have a fixed rate of rent the first year, but you might have a clause that increases the rent based on the cost of living as set by the Federal Government—or any of a dozen other kinds of escalations. One of my favorite is based on the annual gross of the tenant. If they're having a good year, the landlord should too, right? (And net, net, net means the tenant pays everything including the taxes.)

Three years ago I told you the residential market was at the bottom—and I was right. Now I'm telling you the commercial market is starting to come back. Talk to your investment advisor about how you can take part in that market's success with a sector fund or mutual fund in the real estate field, or call a Realtor and ask about commercial opportunity right here. There are some nice buildings—plums waiting to be plucked—right here in Englewood.

Dane Hahn is a real estate professional practicing in Sarasota and Charlotte counties. You can reach him at dane.hahn@gmail.com or by phone at 941-681-0132. See him on the web at www.danesellsflorida.com

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