Real estate investments: The time is now
by Bill Small, Special to the Aspen Daily News
Monday, August 27, 2012
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
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
Why Buy Now?
The answer to the question in this title is pretty straightforward – not only are large acreage recreational property values lower than they have been in almost ten years, an abundance of quality tracts are also currently on the market.
The first thought that this response most likely evokes from
a prospective buyer is, given the current uncertainty with the economy, the
smart play is to wait, let prices continue to drop, then pull the trigger on
that dream property. This scenario sounds simple enough – why would anyone
want to buy right now?
Although the odds of finding that perfect property at a very reasonable price are high right now, this window of opportunity will not last forever. Land prices will eventually bottom out and start the recovery process. Even more important than the recovery of land prices to a potential buyer is the inevitable reduction of quality tracts on the market. Once land prices stabilize, the first tracts to go are sure to be the best ones. By waiting for land prices to continue falling, a buyer is risking an opportunity to purchase a quality tract at a great price that probably has not been on the market for a long time and most likely will not be on the market again anytime soon.
The purchase of a large acreage recreational tract is typically a
substantial long-term investment which requires much deliberation. The main
objective for a majority of buyers is getting a great deal on a tract that
meets all of their requirements. Many buyers are currently hesitant to move
forward in the purchasing process and this hesitancy is justified by the
uncertainty of land prices recovering. For those considering the purchase of
a recreational property take a look at the following statistics <http://www.
from the United States Department of Agriculture during the Great Depression
“Agricultural land values saw the largest percentage declines of the
century in the early 1930′s, the beginning of the Great Depression.
Agricultural land values dropped 37 percent over a period of 3 years and
remained between $30 and $33 per acre throughout the 1930′s. Following the
Great Depression, land values were revitalized and began a climb that
continued until the early 1980′s.”
Over the last three years the majority of large tracts of recreational
property in upstate South Carolina have been losing value. Overall, these
properties are currently pushing a 30 percent loss in value since land
prices started declining. An increasing number of recreational properties
currently on the market have experienced major price reductions that reflect
this 30 percent loss in value. A legitimate argument is the current
recession has lasted longer than anyone anticipated and we are close to a
recovery but it will be a slow one. If this argument proves true a valid
assessment of current land values is that although they have bottomed out,
the time frame for recovering value will be significant.
As the slow recovery reveals itself the transactions on quality recreational tracts will increase in frequency as buyers gain more certainty that land values are increasing. Therefore, the best time to get serious about purchasing a large acreage recreational tract is now.
The substantial inventory of nice recreational properties with values 30 percent below pre-recession values will not last long and continuing to wait could very well result in missing out on the chance to purchase that ideal tract at a great price.