Over the past few years, we’ve heard mostly negative things about owning and investing in real estate. Whether it’s residential real estate where values declined 30 percent to 50 percent from the mid-part of the last decade in many parts of the country, or commercial-investment real estate that’s been impacted negatively by the Great Recession, the news would make most people shy away from considering real estate a viable investment. Even lenders, who have historically liked real estate as an asset to lend against, are acting very cautiously toward people who are interested in real estate investments. Although caution is the current rule when it comes to real estate investing, this may in fact be one on the best times in the last 100 years to buy real estate as an investment.
Over the past century, stocks have returned an average of 11 percent annually. Over the past five years, the return on stocks as measured by the Dow and other stock indexes has been a disappointing zero. The Dow average was 13,057 in August of 2007 and closed this past week at 13,158. Even less exciting are the returns on currently available fixed investments. Short-term CDs and government bonds range from less than 1 percent to 3 percent for long-term U.S Treasury bonds and to less than 7 percent for corporate junk bonds.
By comparison, a good real estate investment, properly structured, can produce overall annual returns ranging from the low to mid-teens for the best and most conservative investments, to higher returns in the 20 percent-plus range for more entrepreneurial investments. In addition, tax benefits unique to real estate can add to those returns. Depending upon what type of real estate investment you purchase and how you structure the investment, you could also expect anywhere from a 3 percent to 15 percent relatively safe annual cash flow return on your equity invested.
The risk and return from a real estate investment can vary depending upon the type of property from land, residential homes, multi-family apartment buildings to commercial retail, office and industrial properties. Depending upon where we are in the economic cycle, an investor can choose an appropriate investment option. At this point in time, it appears that the residential home market has bottomed and is starting a recovery phase. The National Association of Realtors reported this week that July existing home sales were up 2.3 percent from June and 10.4 percent from a year earlier, making July the fifth consecutive month of improving sales. This could signal the beginning of the next price appreciation phase in the residential market and a good opportunity to invest in single-family homes in high-growth areas and resort markets with great appreciation history, such as the Aspen-Snowmass area.
Real estate also has the benefit of being an investment that has been historically a good hedge against inflation. As a hard asset, real estate typically increases in value as the value of currency declines. Since the early 1980s, the United States has been in a historically low inflationary environment. Many investors believe that inflation is likely to return in the near future as a result of the simulative monetary policy of the Federal Reserve as well as the world’s other central banks. The escalation of gold prices is proof of the fear of returning inflation. Real estate offers the same type of hedge against inflation, while at the same time delivering current cash flow.
As investors look into the future and available investment options, a well-located real estate investment could be a great alternative to stocks, bonds and gold. With mortgage interest rates at historically low levels, and the real estate market likely at the bottom of its value cycle, it could be a great time to consider a well-structured real estate investment for your investment needs.
William Small, JD, CCIM is the Managing Director of Frias Commercial Real Estate, a division of Frias Properties of Aspen. If you’re interested in receiving his monthly market reports, you can reach him at (970) 429-2419 or email him at bill@friasproperties.com.
