PROPERTY - ONLINE

Why you should avoid commercial property

2007-12-27T17:20:00.000-08:00

This feature is part of our FREE daily Money Morning email.
The Bank of England decided to let householders rest easy over the Easter weekend.
We'd predicted the Bank would raise interest rates, but it's clearly decided that one big surprise this year was enough for now, and is waiting for May's quarterly inflation report before it decides on its next move. So for the moment at least, it looks like we can expect a hike next month.
In any case, there's no doubt that the bias remains towards higher rates. And that could be bad news for one asset class in particular...
Interest rate rises are of course, a worry for the residential property market. But another massively popular asset class, commercial property, is also at risk from monetary tightening.
Writing in The Telegraph yesterday, Roger Bootle of Capital Economics posed the question: “is the UK commercial property market a bubble waiting to burst?”
In the past ten years, commercial property prices on average have doubled. “Commercial property has been a very hot sector indeed.” All through last year, it was the top investment sector for private investors, and fund houses across the land have been falling over themselves to take advantage of demand by launching new commercial property vehicles.
As Bootle points out, six or seven years ago, commercial property was a good buy, offering a decent yield over and above that available on equities or gilts - hence the surge in values. But of course, as always happens, people see prices go up, then jump on board the bandwagon, driving them even higher.
These days, rental yields on commercial property are actually below those on gilts, which are the closest thing to a no-risk investment you can get. In other words, investors in commercial property already get "less of an income return... than they do from gilts - despite the much greater risks."
Gilt yields are already historically low, and with the base rate looking set to rise, they are more likely to rise than fall in the year ahead. So for commercial property investors to have any hope of a decent return, rents have to rise. But as Bootle, says, strong rent rises are unlikely too. “There is a fair amount of unused commercial property available and commercial property construction has been high.”
There are other serious structural threats to the market. It's now just over a year since the Dixons brand vanished from the high street and onto the internet. While opinions on the success and wisdom of the transition have been mixed, the travails of other specialist retailers like HMV show that maintaining a branch network for products which are cheaper and easier to buy online is set to be a thing of the past.
Companies simply can't afford the overheads. The costs of paying rent, rates and wages to maintain and staff a high street branch have to be reflected in the selling price of the in-store products. If your internet-based competitor has just a warehouse and a call centre to run, then it can afford to offer cheaper goods while maintaining healthier profit margins. That's an entirely unsustainable level of competition.
And it's not just specialist retailers. They might be the first to go, but other sectors are ripe for following them online too. The banks aren't overjoyed at having to keep all those local branches open for a start. They may have retreated from high-profile mass closures in the face of a consumer backlash, but there's no doubt that they would rather migrate more business onto the internet - particularly now that they'll be looking for more areas in which to cut costs as the regulator cracks down on penalty charges.
Whether this means we can look forward to high streets filled with cafes and street markets, or derelict premises covered with graffiti, only time will tell. But we don’t think it will be that long before we start to find out.
Mr Bootle reckons that there will be a “petering out of the boom in commercial property but no bust, at least as long as values are not carried much higher than they currently are.”
But to his credit, he points out that he’s not at all sanguine about this viewpoint. “The end of the good times usually brings some sort of nasty shock.” As he warns, “commercial property used to be regarded as risky but now investors seem to think it is safe. They could be in for a shock.”
Of course, commercial property’s not the only asset to have been buoyed by cheap money – almost everything from art to fine wine has seen massive price inflation. So in a world where rates are rising, most investments look vulnerable.

2007-12-27T01:29:00.000-08:00

A Smarter Way To Invest

Statistics show that nearly 95% of our fellow citizens will retire at or below the poverty line by the age of 65. These people will be dependant on friends, family and the Federal Government for financial support.

If ours is the land of opportunity, why does this startling reality exist? The answer can be traced back to our upbringing.

From our early years we are taught that the correct path in life is to go to school, get good grades, and get a "secure" j.o.b (Just Over Broke) with benefits. Sound familiar?

And let's face it folks, you won't ever get rich working for someone else! With "Job Security" a thing of the past, thousands of people are looking for alternative ways to make money.

Real estate investment continues to be one of the largest wealth creation tools in America. It remains one of the fastest and proven ways to amass a fortune, and more importantly, once you understand the basics, almost anyone can do it.

Incredible profits can and are being made by purchasing run down homes and improving their value with a quick makeover. The strategy is quite simple: Buy a run down home below market value (wholesale), fix it up, and sell it for full retail price.

Newcomers to this field are advised to devote considerable time to research and study. Before you test the waters, there are four factors that you should consider:

1. You must know something about remodelling and get an idea of how much it will cost to get the house back into shape. Consider what you will be able to do yourself and what it will cost if you have to have it done.

2. The location and design of the home are two of the most important factors to consider. Study the neighborhood, shopping and transportation facilities.

3. You make your profit when you buy. Therefore, you must learn how to calculate your ideal purchase price.

4. You should always finance the project in the most inexpensive way and use very little if any of your own money.

Why is it a smarter way to invest? Traditional buy and hold is too slow for my liking. Buying a home and relying on the market to go up is one of the riskiest ways of investing that I know of. I call it the buy and hope strategy!

I prefer a method that will give me my profits up front, and any increase in value from market forces should be seen as a bonus.

Still not convinced? Well, here are another four powerful reasons why:

1. Fast track your capital growth: The biggest advantage of the buy, fix-up and hold strategy is that you can make instant capital gains of 10 to 30 per cent over and above any gains made from market forces.

2. Make $100,000 plus per annum: If your objective is to buy, fix-up and sell, then a six-figure income is not out of the question. The equation is quite simple really: Five properties flipped at a $20,000 profit each equals $100,000!

3. Sack your boss: Depending on your financial circumstances, you may be in a position to generate enough income and stop working full time.

4. Get a life: You have probably heard the saying that the day you find a job that you love doing, is the day you stop work. If, like me, you enjoy rolling up your sleeves and getting your hands dirty, then this may be the greatest career move that you make.

As you can see, fixing up old homes does have its advantages over traditional strategies. Sure it may take more work, and things don't always go to plan. But as anyone who is wealthy will tell you, their level of success has a direct relationship with the effort they put in.

2007-12-27T01:12:00.000-08:00

Ten Steps for Becoming a Successful Real Estate Investor

The secret to success in real estate investment is finding bargain properties that you can "flip" quickly for a profit. Here are a few ideas for becoming a successful investor:

1) Obtain sound advice from investors who are already successful. Friends and realtors can refer you to folks who have proven investment track records.

2) Define your investment goals. Do you want to buy a home to live in, to fix and sell, or to hold for your future?

3) Read real estate investing books and articles, attend workshops and seminars, while AVOIDING out-of-date infomercials.

4) Choose a lender with great service, a good closing record, and fair costs, and get preapproved for financing.

5) Define your target locations, and become an expert. Study real estate newspaper sections, pick up sale flyers, and note sales prices in your target area.

6) Interview real estate agents and learn from them, but don't sign any agreements that will limit your search for bargain properties. You're looking for agents who know your target market thoroughly and will work hard to find properties for you.

7) Find a good escrow officer and use them for every transaction. They'll know your needs and will quickly learn how to expedite your transactions.

8) Study home remodeling techniques by reading design magazines and books. Learn the cost of materials, supplies, and building trades by visiting home improvement warehouses and talking with remodeling professionals.

9) Make many offers on properties, including bidding on HUD repos, asking for great terms and concessions from sellers. The more offers you make, the greater your chance of success.

10) Always have your transformation in mind. Have a plan for what will turn a doghouse into a dollhouse. It will speed turnaround time and save you money on mortgage payments.
Copyright. 2004. Jeanette Fisher. All Rights Reserved.

Professor Jeanette Fisher, author of Doghouse to Dollhouse for Dollars, Joy to the Home, and other books teaches Real Estate Investing and Design Psychology. For more articles, tips, reports, newsletters, and sales flyer template, see http://www.doghousetodollhousefordollars.com/pages/5/index.htm