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Thursday, August 7, 2014

Commercial Real Estate's Future Looks Bright

Most investors favor traditional investments like stocks, mutual funds, ETFs, bonds, CD's.  All investments come with intrinsic and extrinsic risks for their rewards.  To balance the risk vs. reward scale, many investors use an "asset allocation" strategy for their investment portfolios.  They constantly shift the type and percentage of securities they own, often making grave errors.  That is why many of them hire financial planners.  The creator of comic strip character, Dilbert, believes the financial industry is a total scam: Adams on Yahoo.  I happen to partly agree with him, and this is because I believe behavioral psychology plays a large role in the decision making of many investors.  A professional would help keep an investor's emotions in check.  Although, the overwhelming body of evidence has made it clear that indexing, i.e., buying low-cost mutual funds or ETFs that track the market will outperform Hedge funds and actively managed portfolios alike, almost all of the time (with a few exceptions...there are a handful of Hedge funds that outperformed the market in 2013...and I mean a handful: Guess which article).

   Dilbert Creator: The Financial Industry Is The World's Biggest Scam
Credit: Fred Prouser/Reuters

The Case for Alternative Investments in an Overheated Equities Scenario

If 100% of your portfolio is comprised of traditional investments, and you believe that by diversifying within the world of securities you have swayed the balance of risk versus reward in your favor, you are sorely mistaken.  Do you think that by owning publicly traded real estate investment trusts (REITs), whether they are a bag of residential or commercial dealing companies, you have added exposure to alternatives?  Publicly traded REITs that you can buy shares from in the open market act more like equities, than they do as hard, tangible, real estate assets!  They too will be hurt by a systemic decline in equities, like the type we are due for any day(s).  These are tied/linked to the stock market!

File:Asset Allocation.pdf
How can you truly diversify your portfolio then?  You will need to bite the bullet at some point in your investing time table and actually purchase an alternative investment.  What's an alternative investment?  The alternative investment most people are conscious about is real estate, owning a rental, i.e.  There are other alternative investments you can get your hands on with more cash on hand.  Accredited investors utilize private equity deals or put their money (accounts range in the hundreds of thousands) in private equity firms, hedge funds with an alternative investment focus, master limited partnerships or MLP's, and other alternative assets.

There are many ways to get your hands on a rental property.  A real estate investor who is just starting out will be going at it by flipping.  This is where they take title of a property at a low price, rehab, and sell it for a profit.  These investors will make their living like this for some time, until they have enough "working capital" to be able to keep a property they have rehabbed on their books as a rental, an asset in their business portfolio that earns income for the LLC these investors usually form.  Are you a real estate investor?  Probably not.  So how do you come to own a rental property to add to your portfolio?



There are two ways to invest in a rental property for the 90+% of people who have jobs and aren't highly paid employees.  1) Save, save, save....until you have enough to stroke the entire cost of the property, i.e. be a "cash buyer."  Whether or not it behooves you to lay down that much money will depend on the Cash on Cash return you will get and Internal Rate of Return, also on your tax situation.  All income from any source is taxed!  Meanwhile, mortgage interest is tax deductible and so are expenses tied to your rental.  So...play it wisely.  2) You can get conventional financing, i.e., a bank loan.  Most banks now are looking for investors to approve who can put down 20% or more on the subject property.  Most importantly, they are looking for credit worthy individuals or partners whose debt to income ratio is adequate...little debt...lots of income!

What if you can't afford to buy a rental outright or qualify for a conventional loan?  Are you squeezed out of the alternative investing world?  Not any more.  The JOBS ACT now allows non-accredited investors to participate in investments that were inaccessible to them in the past.  That is why crowd funding sites like Realty Mogul site have taken form and are expanding rapidly.  I will say that investing in crowd funding nationwide companies like Realty Mogul do require a level of financial worthiness.  You may not qualify! Or maybe you will.

The Case for Commercial Real Estate Investing through Crowd Funding




So you can't close on a residential property for whatever reason and add an alternative investment to your portfolio.  Do you give up?  Of course not.  Real Estate is an alternative investment you must have in your portfolio.  If you can't do it through Realty Mogul, you can still invest as a California resident, with a company like Rich-Uncles.  Currently owning 23 commercial real estate buildings, the Nexregen Real Estate Investment Trust distributes its rents from credit worthy tenants in the form of quarterly dividends for as little as a $5,000 initial investment.  Nexregen is a non-publicly traded REIT, meaning, it's not tied to the stock market!  Also meaning that you will stand to gain from the appreciation factor of real estate.  Finally, the criteria to qualify as a Rich-Uncles investor is not as stringent.  See RU site.  Disclaimer: I am both an investor and paid associate.

I like the Rich-Uncles investment for many reasons and I can share these with you.  Just email me: calilimexica@yahoo.com. I would not be recommending this investment if I didn't feel it was a great investment for our current economic scenario in the United States and the world.  To back me up I have the following two articles that you should read if you are interested in this investment opportunity.  They make the case for investing in commercial real estate today and were the reason why I titled this blog post: Future Looks Bright for Commercial Real Estate.
 
Commercial RE & Rising Rates  and Commercial RE forecast for 14-15


Until next time!

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