Real Estate Investment Types

Once you’ve got residential properties under your belt, the next easiest is investing in and managing industrial and commercial properties.

Renting Your Residential Properties
If the path of development stalls or turns in another direction, your bet on higher appreciation bailing out your investment turns out to be a sucker bet.

 

An excerpt from Book Five in “The Knowledge Path Series” dedicated to helping you find the place of your dreams in the Sierra Mountain resorts.

Part Two in a 5-Part Series: Is An Investment in Real Estate Right for You?

Part One: FOMO

Real estate experts recommended multifamily properties as a good first step while skipping raw land that only produces expenses not income until you sell.

By comparison multifamily rental units provided steady income.

Multi-Family Rentals
  • Normally rent checks came monthly by mail while the value of the unit appreciates.
  • Of course, now in a frictionless economy, they can be directly deposit funds into your account without delay.
  • Another example of, with the right insight, a fully functioning Knowledge ATM.
  • On the downside you’ll need to deal with problem tenants from time to time.
  • Depending on the age and condition of the property you’ll begin to incur high repair costs that will eat into your profits at some point.

Once you’ve got residential properties under your belt, the next easiest is investing in and managing industrial and commercial properties.

Renting Commercial Properties
  • The experts caution about jumping into large properties, advising beginners to start small.
  • Incomes tend to rise and fall with the ups and downs of the economic cycles.
  • When conditions favor your property and your vacancies are low you can generate large incomes with a full building.

What about shopping centers and strip malls?

Strip Malls and Shopping Centers
  • Like commercial properties in good times which generate high incomes with centers and malls you can share in the gross receipts of your tenants.
  • And, with the right location your land can appreciate quickly.
  • But, there’s a downside.
  • Buying can be complex and difficult to negotiate due to the property’s high cost.
  • So, zero cash deals can be extraordinarily hard to work out.
  • And, remember sophisticated tenants want to negotiate their best deals which will eat into your profits.

What’s the attraction to raw land?

Low Barrier for Entry with Raw Land
  • In great areas it can appreciate very quickly as development approaches your location.
  • And, before the path of development becomes common knowledge you may be able to tie up property for as little as $ 1.00 down.
  • However, without the strong appreciation probability, raw land requires improvements like streets, sewers, electricity and other utilities — all costs.
  • So it rarely gives you a positive cash flow, especially after the tax burden is factored in.
  • If the path of development stalls or turns in another direction, your bet on higher appreciation bailing out your investment turns out to be a sucker bet.
Initial High Cost of Entry in Self Storage

Likewise, building self-storage warehouses incurs out of pocket expenses.

But once they are built, or if you buy existing units, you can enjoy positive cash flow with little overhead and low operating expenses if you keep your vacancy rate low.

Steps:

(22) Selectively evaluate the best quality-of-life communities to live in and weigh the tradeoffs of risk and rewards for accruing real estate appreciation along a progression of rural and small towns that meet what your pocket books can afford.

(34) On your visits look for any newer developments that may trigger changes in neighborhood patterns. New construction in or around the neighborhood? Major regional economic adjustments? Transition from households with children to ones that are empty nests? Rezoning, and dramatically rising/falling land values?

Determinism

Psychologists have found that midlife is typically a time when many of us take stock of our values and goals. 

Resort Investments
Predictable Real Estate and Consumer Trends as Generations Change Aging through Life Stages.

Part One in a 4-part Series evaluating real estate and consumer predictions as generations transition throughout successive life stages.

Fifteen years ago in 2002, as Mammoth Lakes realtor Paul Oster reminded us, Harry Dent built several real estate scenarios on shifting demographics called “Age Demographics, Buying Cycles and Real Estate Appreciation”.

And years earlier management guru Peter Drucker wrote about how dismal most predictions turn out, except for one type.

Those based on fundamental demographics.

If I remember correctly he coined the phrase “Demographic Determinism”.

Dent said as a new generation enters the workforce around age 20, we can expect commercial real estate to boom.

20-Somethings in the Labor Force

But, why?

The influx of new workers stimulates demand for office space and manufacturing facilities. 

Since these new workers are also consumers, there is increased demand for new stores and shopping malls.

Of course Amazon, losing money quarter after quarter in 2002, had only just begun to exercise its disruptive influence over traditional retailing.

Why Go to the Mall?

And the older Millennials coming of age in high school may have remembered a time when Amazon didn’t exist, but their younger brothers and sisters act as if they didn’t.

But as a rule of thumb, when it comes to residential housing you can identify five age-specific buying cycles.

Over the life span of a generation, spending on each category accelerates to peak at predictable age intervals.

When an entire generation goes through such predictable property spending patterns, we get a macroeconomic view of the wave-like fluctuations in real estate demand.

As a result, investors can know years and even decades in advance what kinds of properties are going to be hot and when. 

For example, someone who is 52, a “youngish Baby Boomer” or “oldish Gen Xer,” and at the peak of his earnings doesn’t typically rent a one-or two-bedroom apartment for himself—though he might rent one for his 24-year old daughter.

Dream Vacation Home

Instead, he’s thinking about what kind of vacation home he wants or, if he’s already purchased it, how to transition to retirement in 10 years or so.

But, his daughter, just now transitioning from school-to-work, represents the median age for the Millennial generation.

In 2015 we already know her generation ranges in ages from 18 to 35.

They will be segmented into at least six life stage lifestyles.

  • 20-29 Year Old Singles
  • 20-44 Year Old Families
  • 25-54 Year Old Singles and Families
  • 30-44 Year Old Singles and Couples.

What’s their impact on apartments and retail shops?

The demand for rental apartments and retail space including shopping centers, begins to accelerate from 19 and peaks around age 26.

Here’s where the rules of thumb may need to hitch hike down the road for a few years.

Demand for Family Starter Homes

Starter home purchases begins accelerating at around age 26 and reaches a peak around age 33.

Oops.

Maybe, something else is going on, as we track Millennials through time.

Part Two: Demographic Lifestyles and Buying Power

Steps:

(19) Anticipate the growing shifts in life and business. Nobody wants to swim upstream if the current is moving everything in the opposite direction. Clue your fans in.

An excerpt from Book Five in “The Knowledge Path Series” dedicated to helping you find the place of your dreams in the Sierra Mountain resorts.

Pros and Cons of 3 Options

Part Three in a 4-part series weighing the pros and cons of investing in real estate over the course of a life time.

Home Sale Assumptions
NOTE: – Double and triple check your scenarios with a financial planner whose fiduciary duty is to you!

Option One – Downsize and Buy.

Couples sell their home and purchase a less expensive house.

Pros:

For both couples, this option

Generates extra income for consumption, provides a legacy for their heirs and allows them to enjoy the comfort and autonomy of home ownership. 

Security to Enjoy Life

It also preserves the option to further tap home equity in the future through various types of loans which will be discussed later.

Cons: 

Don’t forget both couples have to

… maintain and cover the continuing expenses of a home. 

They might also have difficulty finding a less expensive home in the same community — or timing that purchase with the sale of their original home. 

Or, the stress of relocation.

Once they find their new home, they have to incur the emotional and monetary costs associated with moving.

Option Two – Sell and Rent a less expensive residence

Pros: 

Both couples escape the expense and responsibility of maintaining a home.

Enjoy the Amenities

They might also have greater latitude to move to a different location immediately or as their circumstances change.

Cons: 

As renters, both couples lose control over their future housing costs.

They’ll face constraints when they want to personalize their home to suit their specific needs or tastes.

And maybe more significantly.

The Smiths, in their early 60s, could also face high cash outflows in rent for many years — longer than it takes to pay off a 30-year mortgage if they live until their mid-nineties.

Option Three – Become a landlord. And a renter.

A third option available to our couples would be to rent out their existing home and to rent a less expensive home.

If they convert their home to an investment property, this will introduce some changes to their financial situation. 

The income they receive from renting out their home will be treated as taxable income. 

They can now deduct certain home expenses such as insurance and maintenance and are able to take depreciation on the property.

Pros: 

Good news. The original home can be handed down to future generations —

… a potentially substantial benefit.

Cons: 

Cash flow concerns.

Unless the rental unit is significantly less expensive than the original home this choice will produce minimal additional cash flow.

At this stage in life do you really want a part-time job?

Fixing Up After Last Renter

Plus deal with the emotional wrench of maintaining your home for someone else.

Also, remember the following points for the renting out existing home scenario:

Home is depreciated on the 27.5 year straight-line method as required under current tax law. See IRS Publication 257 — Residential Rental Property.

Home maintenance and insurance are deductible as rental expenses.

An excerpt from Book Four in “The Knowledge Path Series” dedicated to helping you find the place of your dreams in the Rocky Mountain State.