Feature Article

Big business is in big trouble. In some sectors, the economy appears to be drying up. Seemingly stable corporations have capsized, leaving investors to wonder what should be the next order of business. And in the virtual sector of e-commerce, many dot-com dreams have also gone down the drain. Such uncertainty has most would-be investors looking beyond the quick-cash bull market boom of recent times—looking for something real.

For many, nothing proves to be a more tangible and stable investment than that of real estate. A far cry from the paper profits of stock certificates or the virtual gains of tech ventures, real estate investment provides a safe haven from the stormy seas of the bear market. As an investment, real estate—particularly commercial real estate—has fared better than the stock market. Bloomberg’s Real Estate Investment Trust (REIT) Index shows values generally climbed throughout 2001 and the first half of 2002.

While the recent renaissance of real estate investment may be new to our “new economy,” it follows a well-established pattern. According to research from the Milken Institute in Los Angeles, weak stock markets have historically been linked with periods of increased investment in real estate.

Currently, market trends are up in both the residential and commercial real estate sectors. Since late 1999, the stock market has lost about $2 trillion in value, while the value of investments in residential real estate has grown by $3 trillion. And a mid-July analysis by Merrill Lynch found that investors had put a total of $2.7 billion into REITs since January 1, compared to just $34 million for all of 2001.

One strange quirk that makes commercial real estate ventures appealing is the fact that, despite our economic slump, consumers have continued to spend—thus, keeping retail landlords in business. In addition, retailers tend to sign long-term leases, keeping turnover down and income steady.

Averaging a return of 12-13% in recent years, commercial real estate investments may not have the instant enticement of some stocks, but their relative security and stability—along with their many benefits—make them an attractive option.

The bevy of benefits that accompany commercial real estate investments include: easy entrance, lasting value, cash flow and—perhaps most importantly—tax advantages.

Easy Entrance 

Obviously, some assets are required in order to break into the world of commercial real estate investment. But because financing terms often allow as little as 0-25% down, entrance into this type of investment is comparatively easy. (Try telling your stockbroker that you’d like to purchase some corporate shares at those same terms. You’re not likely to find as warm of a reception as you would with your real estate loan officer.)

Lasting Value 

While real estate endeavors may take some time to pay in full, chances are that their value will hold steady and, in many cases, continue to ruse. You may have seen your retirement fund drop 50% or more in less than a year, but real estate values very rarely experience such a drastic drop. The almost certain guarantee of capital appreciation is something that all investors can appreciate.

Cash Flow

It’s true that you have to spend money to make money. But it’s even truer that you have to make money to spend it. With real estate investment, residual income from investment properties that are leased can produce positive cash flows. In this type of investment, “dividends” are paid out on a regular, dependable basis.

Tax Advantages

Even when the market is at its most uncertain, one thing remains written in stone: Taxes. Everyone’s greatest lifetime expense, taxes can wreak havoc of colossal proportions on investors. Again, the rewards of real estate investment can be great.

Both depreciation and ordinary expenses (such as interest, property taxes, utilities, insurance, maintenance and legal fees, to name but a few) can greatly increase deductions, thus, reducing your tax liabilities.

Refinancing property debt may also help to deter taxes. Through refinancing, one can actually withdraw cash without being taxed on the proceeds—even if the amount withdrawn is greater than the original investment.

Perhaps the most powerful tool in controlling tax liability in real estate ventures, however, is the 1031 exchange. With this, tax liability can be deferred indefinitely. And by timing a sale carefully, you can also completely control when you recognize capital gains.

Another advantage that accompanies real estate investment is the control one has, both over the actual physical property and the decisions of when and where to invest.

By staying connected with real estate developers, the local economic development council and government agencies, one can gain and use insider knowledge. What would raise eyebrows with other securities exchanges can instead raise profits when the investment at-hand is real estate.

Once properties are added to your portfolio, you have the power to make all executive decisions. Unlike many CEOs as of late, you can ensure that all actions taken are in the best interest of the investment.

Given the current state of the stock market, it just may be your good fortune if you’ve decided to invest your fortune in real estate. The return on investment is all but guaranteed when you put your funds into something real.

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