Commercial real estate owners want to know the most likely buyer of their commercial investment property. This knowledge can help the owner to strategize on the marketing of their property.
The indications below are general guidelines and specific to the San Francisco Bay Area. They are not hard and fast rules, but merely meant to help investment property owners understand to whom they will be marketing their property. [Read more…]
Recently I wrote a post detailing what inflation was and that a hedge fund manager had recommended commercial real estate as a potential hedge against inflation. I realized that I hadn’t explained why commercial real estate acts as a hedge against inflation and a store of value.
In the previous post I shared that inflation makes money purchase less goods and services. The downside of this is that it can affect the lifestyle of anyone with a fixed income. A set income of $6,000 per month will by fewer services, fewer goods, and less entertainment as prices rise.
Commercial real estate investments that adjusts with inflation can work to protect the investor against the effects of inflation through income protection and wealth preservation.
The income from commercial real estate is tied to rent. Rent can be adjusted periodically to keep up with inflation.
Rents tied to short term leases, as in apartment properties, are easily adjusted on a regular basis (yearly) to account for the effects of inflation. Self-storage properties are another type of commercial real estate that generally have short term contracts/leases that can be adjusted as inflation takes effect.
As inflation occurs, rents can be increased to track inflation. The increased income can help the investor to maintain the level of lifestyle that they previously enjoyed.
Commercial real estate also works to preserve wealth because it is a hard asset. The nominal price of a piece of real estate will rise as inflation rises.
If the purchasing power of a dollar is cut in half over a period of time, it stands to reason that twice as many dollars will be needed to buy commercial property over that same time period. In this hypothetical situation, the commercial real estate investor has not lost any of their wealth over the inflationary period, because the market value of his building has risen in step with inflation.
Investment real estate that is prudently leveraged with long term fixed-rate financing has an even greater potential to protect the investor from inflation.
Long term fixed-rate debt provides the investor with the opportunity to buy a larger property than they have the cash for and to maintain a consistent payment until the loan pays off. A fixed-rate protects the borrower from the risks of inflation affecting interest rates and increasing refinancing risk.
The rental income should cover the debt payments for the life of the loan. Each payment reduces the loan amount and increases the owner’s equity in the property, slowly building wealth over time.
If an investor borrows 50% of the purchase price and inflation cuts the purchasing power of a dollar in half over the life of the loan, it stands to reason that the investor’s investment has increased by four times.
You can see the benefits that commercial real estate (and investment real estate) offers to protect owners from the effects of inflation. To begin investing in commercial real estate, please feel free to reach out to me at (925) 385-8798.
Many in the media and financial world are predicting Inflation. Because the Fed is devaluing the U.S. currency, many assume that inflation will come.
What is Inflation? I am glad you asked.
Inflation is the gradual or rapid loss of purchasing power. Many of us have seen this at the grocery store or gas pump. When I first started driving, gas only cost $0.99 per gallon. I recently filled up at over $4.00 per gallon. I used to be able to buy a candy bar at the checkout counter with 2 quarters. Today it will likely cost you closer to $1.00.
In both of the examples above one dollar ($1) lost it’s ability to purchase an item. One dollar used to purchase a whole gallon of gasoline, now it only buys 1/4 of a gallon. A dollar used to buy 2 candy bars, now it only buys you one.
Inflation occurs when an abundance of money chases after scarce resources.
Inflation can ravage the wealth of an individual. If an individuals portfolio does not grow at a rate faster than inflation, the portfolio is actually losing the ability to buy services, food, and shelter.
In the example above a $1,000,000 portfolio used to buy 2,000,000 candy bars. Now it can only purchase 1,000,000 candy bars. If the rate of inflation remains the same, the same portfolio may only buy 500,000 candy bars in the near future.
Exchange the candy bar for bread, water, electricity, or healthcare and you can see the devastating effects that inflation can have on the wealth of an individual.
Kyle Bass is the founder of Hayman Capital, a hedge fund. He made quite the fortune by short selling the sub-prime mortgage market. He spoke to a CNBC reporter after a conference about his thoughts on inflation. A link to the video is below.
In the video Mr. Bass says at the 2:05 minute mark that he expects inflation. At the 2:22 mark he suggests owning productive assets (apartment buildings). At the 2:35 minute mark he also recommends securing long-term fixed rate financing on those assets.
http://video.cnbc.com/gallery/?video=3000143907
If you want to learn more about purchasing hard assets to protect your wealth, please contact Peter at 925.385.8798.
I was talking with a long-time real estate investor over lunch. He said that he had recently realized that real estate investment is a business.
Many real estate investors think that real estate provides passive income (and it does) and that they can sit on the beach while the checks roll on in. However, they don’t realize that it takes work and a plan to develop that passive income.
Many people find themselves self-employed. They end up trading their time for dollars. If they don’t work, they don’t get paid. Robert Kiyosaki calls this “Owning a job.”
Business owners leverage the work of other people to convert employees’ time and effort for dollars. Business owners build a system and a team to produce a product or a service. Business owners can go on vacation and have the business run on its own.
Owning rental and investment real estate is very similar to a business. You have clients – tenants, a product – housing or rental space, managers – property managers, sales – leases and rent, and profit – cash flow.
Realizing that real estate is a business helps the investor develop a plan or strategy to reap the greatest reward from the business. How?
Image courtesy of sritangphoto / Freedigitalphotos.netImagine a strip retail owner. If she thinks of her rental space as a product, she can envision who she will sell it to, how she will market to them, and what they are willing to pay. She can also think through objective ways of making her product (space) more attractive to tenants — fresh paint, a new sign, cleaner landscaping.
Correctly thinking about systems and personnel enable an investor to step away from the day-to-day entanglements of real estate. Viewing your real estate investments as individual businesses can help you to improve the profitability of your properties and your personal wealth.
What do you think? How else does real estate correlate to business? Leave a comment below.
Image courtesy of sritangphoto /Freedigitalphotos.net
On Friday I attended a Commercial Real estate forecast hosted by Northern California CCIM and the Oakland/East Bay BOMA.
Bob Bach, Senior Vice President and Chief Economist of Newmark Grubb Knight Frank, shared his insights on the national market and how the Bay Area stacks up against other markets. Here are bullet points from his research:
Maria Sicola, Executive Managing Director at Cushman & Wakefield and Head of Research for the Americas, shared some of her thoughts on the U.S. economy and on the Bay Area in particular. She focused primarily on the industrial and office markets:
The event was an interesting one overall. Investors in office should stick to San Francisco and Silicon Valley projects where job growth has been strongest. Apartment demand is strong in the entire Bay Area.
If you are looking to invest in any of these sectors or have questions about your current investment, give me a ring at (925) 385-8798.
