|
Commercial vs. Residential Real Estate:
Part V - Synthesis:
This is the last of a series of five articles comparing the benefits and risks associated with four different types of real estate investments: commercial, residential, vacant land and development.
In the past four blogs, we have reviewed the signatures of four very distinct types of real estate investments. This time, we shall attempt to sort this information and assess what might be most appropriate for you.
Yet, before biting into the meat of the topic, let me ask you a question: If you were in the Louvre Museum and a fire was spreading rapidly around you, which painting would you save and take with you?
This question seems way out of place in this article, but just try to answer it in earnest. If your first instinct is to answer Mona Lisa or some work by a grand master, you may be a good candidate to save the world's cultural heritage, or to apply for a job at the UNESCO, but real estate investments may not be the best use of your time. In this particular case, the right answer is: the painting nearest the exit.
This is the nature of the close-to-reality approach, which brings success in real estate.
A brief summary...
As we saw in the first blog, Commercial real estate brings the most stable and forecastable flows of income. But this comes at a cost: commercial real estate is also very demanding in capital and in professional help; doing commercial real estate on the cheap can be disastreous.
As we understood in the second article, real estate developers can make a bundle of money, but they may also loose it all. Furthermore, this real estate sector is extremely capital intensive and necessitates top notch professional assistance.
As we discussed in the third blog, the residential home market is most stable in the real estate field.
As we remember from the fourth article, land is a good way to secure a location for future use, either because you do not need a house yet, or because you cannot afford it but think that you will by a given time in the future.
What is your taste?
Some investors prefer a steady yet moderate income over the opportunity to win big, which often comes with the risk to loose big. You will find below three (3) styles of investments and the corresponding type of real estate choice.
Moderate and regular cash flow: is associated with commercial real estate.
Safety of holding value: comes with residential homes and condominiums in primary markets, such as larger cities.
High return on investment: will reward entrepreneurs bold enough to invest in lots or land; or the even bolder ones who are developers. Without the shadow of a doubt, real estate development is where you see the highest returns on capital invested...But also the biggest loses of capital invested!
How deep are your pockets?
Your taste as described in the previous paragraph may be slightly altered by a reality check: how deep are your pockets, or otherwise, how much are you willing to risk? The paragraph below will supply a general range of how much is needed to become a player in the different types of real estate investments.
The price ranges apply to the most sensible choices within an investment product; for instance, houses and condos sell in much larger numbers, hence quicker, if priced below the $300,000 mark - which does not mean that some houses do not sell for much more money; yet, it makes most sense to invest in homes priced below $300,000.
Please note that the dollar amounts shown below assume that purchases (plus improvements in the case of developments) are paid entirely in cash by one investor. Bank loans or partnerships offer investment opportunities for a fraction of these numbers.
Lots: $10,000 to $2 million
Residential Homes/Condos: $100,000 to $300,000
Commercial: $100,000 to $10 million
Developments: $1 million to $300 million
In conclusion...
Real estate has been, for generations and all over the world in stable countries, the best way to preserve capital. After all, the Rothschild family's magic formula for investments has been since the nineteenth century: one third in precious metals, one third in stocks or bonds, and one third in real estate. Real estate is rock solid!
In today's environment, when gas prices increase by astounding percentages, inflation is a quasi certainty in the near future. With inflation will come a growing unbalance for corporate America to manage its costs. This risk will be accounted for by Wall Street through a much lower market valuations for most publicly traded companies...
...This will further divert capital away from the stock exchange into the shelter value represented by real estate holdings.
As a potentially huge side benefit of inflation comes the brisk increase in property values:
- real estate traditionally surpasses inflation by a few points;
- and, as an added bonus, inflation should reduce the loan-to-value ratios on all properties purchased with borrowed money (creating equity for the investor, and additional security for the banker).
Yes indeed, Real Estate is here to stay. It is probably the best shelter against inflation and the best performer in the economy to come.
Posted by:
Olivier
Monod
Posted:
7/1/2008
|