RealEstate4Charity

Real Estate Investment Ideas in a Competitive Market

Smaller properties tends to trade at a higher capitalization rate. Higher debt cost tend to make highly leveraged entrepreneurs less competitive. Seek and broaden outside your local market to find better deals. Buying out of state may bring more opportunity.

Market Analysis Determines Where to Invest

With all the hype about benefits of real estate investment, there is ever so much competition looking for investment and development opportunities at all deal size ranges. Raising equity or debt financing is normally attainable if you uncover an opportunity where the internal rate of return (IRR) and caps rates actually work these days. Many investors are expanding their scope of investing outside their local area to find new opportunities. A market analysis can be a great starting point to understanding the supply and demand factors of a given area. Also, look carefully at job growth and consumer confidence in the areas. There is a great amount of public information available on demographics and news about local factors driving new opportunities. Pick your area and learn the market, this will help to channel your next investment decision and mitigate future financial risks.

On-Going Investment Decisions to Increase Returns

After acquiring a commercial property, the investor has several decisions to consider over time in determining the optimal holding period. A very common decision these days is to hold and do nothing. That may not necessarily be the best decision to optimize returns. For example, refinancing could be beneficial to returns when the spread between current market interest rate falls 1.5- 2.0 % below the existing mortgage rate. Lease buyouts, renegotiation, and renovation decisions could all have a positive impact on improving returns. Use of discounted cash flow (DCF) methods and IRR to compare alternatives can help financially justify your decisions.

Investment Motivations

Whether you are a new or experienced commercial real estate investor, the following checklist shows some key motivations to qualify reasons for your investment decision:

Positive Cash Flow

Sound investments should generate positive cash flow over multiple years. The income can be used for funding different needs, diversifying investment portfolio or retirement.

Tax Advantages

The cost recovery deductions (depreciation) normally defers ( and saves) taxes.

Real Estate Price Appreciation

Good property will appreciate in value over time. Continual improvements of the real estate along with a stable tenant base also increases value.

Positive Leverage

When an investor obtains financing with a lower interest rate than the yield of the property, this will increase the yield to equity (IRR) as the loan amount increases. This powerful positive leverage causes an even higher increase in the leveraged after-tax yield.

Inflation Hedge

Real estate typically has been an excellent hedge against inflation. With fear of inflation mounting, real estate will remain an attractive investment vehicle in spite of lower caps and higher interest rates.

Psychological Benefits

Real Estate is a physical asset (bricks and mortar) providing psychological security vs. nonphysical assets such as securities.