Tuesday, December 26, 2006

More on Commercial Real Estate

I posted recently about the potential for commercial real estate in Bentonville, Arkansas. Today, a free article from the Wall Street Journal on real estate investors switching into commercial or multi-unit residential investing. The reason is that cash flow is now trumping anticipated appreciation as the key component of the investment. Commercial and multi-unit residentials offer much better cash flow, because they don't have the same speculative inflation priced in. This makes sense, since land appreciates much faster than the buildings themselves (since land is scarce, but buildings can be, well, built).

One notable nugget in the article:

The situation is bleaker for those buying homes and condos as an investment, says Mr. Liang. "They should have very limited expectations on appreciation going forward -- probably 0% to 3% annually for the next five years," he says.

That speaks to why I love real estate as a long term investment. Say properties appreciate 2% per year. If you bought the property on a 90% mortgage (you put 10% down), you're getting a 20% return on your invested money (before expenses, which can be significant). Has there ever been a significant period of time where real estate didn't appreciate a few percent a year? If you ride it out, it provides what I think are higher and safer returns than other types of investments. And in the long term, you can get some great periods of appreciation, like we've had recently. Get someone else to pay your mortgage, and the appreciation will come eventually, turning your $20,000 investment into $200,000 of equity.