Should I Invest in Real Estate in Today's Market?

FALL 2010 UPDATE

What follows are some random thoughts on the Income Property marketplace as I see it, and from what I've heard on the street. By no signifies am I an economist. And I do not think that any one can accurately predict the future. The Commercial Property Market is incredibly dynamic and continually changing. But it is interesting to hypothesize and to see how close we can come to predicting the future. Use these thoughts as an add-on to what you have already experienced and are presently experiencing. The even more views you can get, the far better you will be at understanding this dynamic marketplace and be able to make up your own mind as to how the future will unfold. With that in thoughts, here goes:

I've been told by quite a few economists and market place pundits that the current financial climate can be characterized as an "Atypical" Recession with an "Atypical" Recovery.

Okay, but what does this honestly mean? Clearly, in hassle-free terms, it basically signifies that we are not in your common recession and recovery scenario. While we've been seeing an improving financial recovery because the market place meltdown of 2007-2008 there are signs out there that this recovery is slowing down, possibly even on the verge of faltering, and the recovery is certainly becoming an uneven one.

Globally, all is not nicely. Distinct markets have their own issues such as in Japan exactly where they are possibly looking at a deflationary atmosphere, and absolutely everyone is aware of the U.S. issues exactly where the housing industry is nonetheless on its rear end. Then again, we can generalize by saying that we are in a low growth environment with substantial debt loads both for the government as nicely as for people. Overall, according to these specialists, we can expect to see low consumer demand out there, which will eventually translate to excess capacity. The economies of created nations will continue to go nowhere. The marketplace pundits say that for the reason that the recovery is atypical it is not going to work itself out in just a year or two. Disinflation has been mentioned as a possibility. Not precisely a rosy picture.

The US has just lately announced the implementation of Quantitative Easing whereby the Federal Reserve will go out and purchase Treasuries. This implies the US will be printing a lot of income in order to do this. I guess Ben Bernacke figures that he can print his way out of a recession. Japan is also set to commence printing Yen. You're going to begin seeing currency destruction all more than the location as countries begin playing quick and loose with their currencies. This portends massive inflation down the road. The stock market is in fact predicting high inflation down the road as is evident in the recent runup in the price of gold (investors are putting their dollars in gold so it doesn't erode when inflation begins up). As I write this article the headlines are rife with the new highs that gold is hitting.

Some other thoughts:

Investment advisors have told me that with all of this uncertainty, investors out there are looking for certainty. Thus there is a tremendous demand for safety, i.e. safety of capital along with the requirement for income and yield (since of what the investor/consumer has gone by way of in the last 2-and-a-half years). There is a significant allocation shift going on here.

Remember

• There have been two huge bear stock markets inside ten years
• We have noticed the biggest housing collapse in US history (US customers have seen their single biggest asset severely impacted as well as their sense of security)
• Job destruction in the US has been the greatest because the depression.

This impacts Canada since the US is our greatest trading partner. Thus the consumer/investor desires and requires to cut down danger in their portfolios. As a result the Demand & Need for Income! Savings have been impacted substantially (due to the recent setbacks in the housing and stock markets). Many people are living longer yet retiring earlier. Those folks retiring have been shocked to understand that their retirement income has been impacted to the point where they need to return to the workforce. People are looking for SOLID Danger-ADJUSED RETURNS.

People today are going to save, not spend!

Investors are now looking for Stable Cash Flows, Solid Balance sheets, & growing dividends.

So what does the future hold?

My best guess and personal viewpoint is that we are halfway by way of a three-four year deflationary period that will be followed by high levels of inflation. For this reason 1 wants to get BOND substitutes that will do nicely in an inflationary atmosphere (you will need to have to grow your leading line when your cost of capital increases). Investments that can be acquired at a great value, that can supply stable dividends, and dividends that can be increased more than time will be the ones that investors seek out. In other words: BACK TO THE Fundamentals OF INVESTING.
Exactly where to appear for these investments?

My answer is: BRICKS & MORTAR INVESTMENTS! Particularly Investment Real Estate.

Why investment real estate?

It's A Safe ASSET. Here in Canada investment real estate is viewed as a Secure Asset Class (SAC), then again it can be turned into an unsafe one (ie. the US Housing market exactly where valuations had been pie in the sky, mortgages had been provided at higher than 100% of the inflated underlying value, and the mortgages were non-recourse to boot!).

IT Gives STABLE Cash FLOW STREAMS THAT CAN GROW Over TIME. Well-positioned real estate will constantly be in demand. If purchased at a fair value then it can provide years of stable money flow streams. Being properly-positioned would also bode well for future increases in the rent, as properly as future appreciation of the property itself.

It's INFLATION PROTECTION. Well positioned investment actual estate gives an superb hedge against inflation. As costs in the marketplace boost so do the underlying rental rates. Therefore your cash flow increases as inflation increases. We all know that the cost of a property is a reflection of the income it produces. Improve the income of the property, and you boost it is value.

ALL-TIME LOW COMMERCIAL MORTGAGE RATES. Any historian of commercial mortgages will know that we are in a period of all-time low commercial mortgage rates. The time has by no means been far better to secure a superb rate for your investment property. The market place pundits are predicting that these rates will possibly be about for the next couple of years. Take advantage of these awesome rates now, or kick your self in later years for failing to act.

According to the specialists, the most productive technique moving forward will be: "Investments that are REASONABLY PRICED that have the Ability TO PAY Money DISTRIBUTIONS & THE Capacity TO GROW THOSE Money DISTRIBUTIONS.

NEW MANTRA: "Secure Income at a reasonable price" (SIRP) Equity investors have gone by means of the ringer twice. They will need to get away from those volatile cost swings. They've had enough of the proverbial flyers.

Again my answer as to where to invest is in well-positioned genuine estate acquired at a very good value. These kinds of properties will be your bond substitutes that will do well in an inflationary atmosphere. They generate Stable Cash Flow streams that can grow over time - and provide you with Inflation protection.

Remember you want discipline in not taking on huge leverage (say a maximum 50% Loan-To-Value Ratio). The concentrate requirements to be on value. Shopping for properly-positioned investment actual estate at a fantastic value will give you the very best chance for growing your money flow streams over time as properly as rising your equity for investors.

The industry analysts tell me that Canada, Australia, and the Scandinavian nations all have good investment real estate fundamentals

What kind of returns can one expect?

We are seeing a 5-8% Return for North America Income Property. In Canada particularly we are seeing an 8% return. This is based on a 6% Yield on an Income Basis and a 2% Appreciation & Money Flow Growth Yield.

For all of the above causes I really feel that now is the time to invest in genuine estate.

There are various methods to in which 1 can invest in Investment Actual Estate. You can begin off modest by purchasing Units of a publicly traded Real Estate Investment Trust or REIT as they are referred to (be sure to do your homework or seek out an investment advisor before investing). If you want a bigger slice of the pie, you may want to look at private Actual Estate Syndications whereby your money gets pooled with others to get a good quality asset that would otherwise be out of your reach. The remaining alternative would be an outright obtain of a property on your own.