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Is Real Estate Still a Good Invesment?

September 1, 2010 – 11:55 am

Business cycles in real estate generally last 3 to 5 years, in my opinon and observations.  It seems as though the current down cycle we are in started around 3 years ago but we obviously are not yet out of it.

However, things seem to have tailed off and are most likely stabalizing in many areas of the country.  While we have a long way to go before things are booming it is looking like the start of a pretty good time to get back into the commercial real estate market.

I know that investors are constantly griping that although property prices have fallen they have not in general, gone down to pennies on the dollar.  Strangely, in one of the worst economic cycles in this country’s history, prices will probably not fall a great deal farther if at all.

The Federal government has worked with banks to allow workouts that did not happen in the early 1990s.   The pressure is off the banks to foreclose everywhere they can and so the market has developed a floor that did not exist in the 90s.

Sure financing is still an issue but it can be obtained with enough down payment.  Banks are gun shy and rightfully so. Of course money is almost free to them so why take any risk if they don’t have to.

Every property on the market is not necessarily worth buying. In fact most still aren’t as owners in general have refused to sell at current market prices.  However, a well thought out investment in a commercial property with good tenants and leases that are close to market will do well in the future.

Cap rates are higher now than they have been most of this decade and while they will not go as high as they did in the 90s they are most often higher than the interest rate on the loans available.  That makes for positive leverage and an opportunity for good cash flow.

We are now actively looking for deals to buy that are not necessarily historically at rock bottom prices but deals that will make a lot of sense in the future. Because of the use of leverage and pay down of debt, commercial real estate has always been the best source of wealth over the long term. Nothing has changed.

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