2016 is now here, and it’s time to put up or shut up on your New Year’s Resolutions. Assuming that your goal for 2016 is to maximize the return on your investment dollars, how do you actually put that into practice? The stock market is dead or dying, junk bonds are in peril of complete collapse, CDs are paying nearly nothing. So where is the financial opportunity in the U.S. today? The answer is simple: commercial real estate.
Commercial real estate offers high returns mixed with lower risk
All investments are graded on a “risk vs. reward” basis. But the changes in America have led to a unique era in which commercial real estate is actually lower risk that such prior stable items as bonds. The reason is that it’s a safer bet for real estate to hold its value than for companies that are not asset backed and are subject to so many different competitive forces from currency valuations to on-line competition. Since real estate has long outperformed all other investments on a return basis, it’s a no-brainer now that it is the highest performing and the lowest risk at the same time. And we don’t expect this to end any time soon, as the world economy continues to decline.
Commercial real estate offers the ability to obtain attractive leverage
One factor that real estate has always excelled at is the ability to use sensible leverage. All other investment avenues (stocks, bonds, even buying a business) have offered virtually no ability to borrow against the asset you are buying. But commercial real estate is normally financed at a level of 70% to 80% loan to value (also called LTV). This means that a $1 million property only requires $200,000 or so of cash to buy it. The leverage is the key component to a high return. A three-point spread between cap rate and finance rate typically leads to a 20%+ cash-on-cash return. Compare a 20% return to a CD – that’s almost 20 years of income for the CD to equal what you get in just one year for the real estate asset.
Four sectors of commercial real estate have superior fundamentals
We have found that there are four sectors that have the best fundamentals in commercial real estate: 1) mobile home parks 2) RV parks 3) billboards and 4) self-storage facilities. All of these sectors share some unique attributes which include:
- The ability to buy from the original moms and pops, which allows for lower pricing and often seller financing.
- Positive side of all U.S. megatrends, from an aging population, to endless recession and upheaval, to the internet.
- Available financing at very attractive terms.
- Low competition as they are not a part of mainstream real estate for most American buyers.
The U.S. has entered a new era in which commercial real estate is clearly the best investment category on both a risk and return basis. If your New Year’s Resolution is to invest better in 2016, then you need to investigate these real estate sectors more fully.