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In my previous Exploring Real Estate Investments Blogs part 1 and 2, we discussed the various categories of available real estate investments, including direct property ownership, mortgages, and debt or equity securities. What these real estate investments have in common is that there are one or more tangible real estate properties underlying each investment. That means when you make an investment, it is important to consider the characteristics of the underlying real estate because “the performance of those properties will impact the performance of your investment”.
When you’re looking at the underlying real estate, one of the most important criteria (aside from location, location, location!) is the type of property. When considering a purchase, you need to ask yourself whether the underlying properties are, for example, residential homes, shopping malls, warehouses, office towers or a combination of any of these. Each type of real estate has a different set of drivers influencing its performance. You can’t simply assume one type of property will perform well in a market where a different type is performing well. Likewise, you can’t assume one type of property will continue to be a good investment simply because it has performed well in the past.
Income-Producing and Non-Income-Producing Investments
There are four broad types of income-producing real estate: offices, retail, industrial and leased residential. There are many other less common types as well, such as hotels, mini-storage, parking lots and seniors care housing. The key criteria in these investments that we are focusing on is that they are income producing.
Non-income-producing investments, such as houses, vacation properties or vacant commercial buildings, are as sound as income-producing investments. Just keep in mind that if you invest equity in a non-income producing property you will not receive any rent, so all of your return must be through capital appreciation. If you invest in debt secured by non-income-producing real estate, remember that the borrower’s personal income must be sufficient to cover the mortgage payments, because there is no tenant income to secure the payments.
Office Property
Offices are the “flagship” investment for many real estate owners. They tend to be, on average, the largest and highest profile property type because of their typical location in downtown cores and sprawling suburban office parks.
At its most fundamental level, the demand for office space is tied to companies’ requirement for office workers, and the average space per office worker. The typical office worker is involved in things like finance, accounting, insurance, real estate, services, management and administration. As these “white-collar” jobs grow, there is greater demand for office spaces.
Returns from office properties can be highly variable because the market tends to be sensitive to economic performance. One downside is that office buildings have high operating costs, so if you lose a tenant it can have a substantial impact on the returns for the property. However, in times of prosperity, offices tend to perform extremely well, because demand for space causes rental rates to increase and an extended time period is required to build an office tower to relieve the pressure on the market and rents.
Retail Property
There is a wide variety of Retail properties, ranging from large enclosed shopping malls to single tenant buildings in pedestrian zones. At the present time, the Power Center format is in favor, with retailers occupying larger premises than in the enclosed mall format, and having greater visibility and access from adjacent roadways.
Many retail properties have an anchor, which is a large, well-known retailer that acts as a draw to the center. An example of a well-known anchor is Wal-Mart. If a retail property has a food store as an anchor, it is said to be food-anchored or grocery-anchored; such anchors would typically enhance the fundamentals of a property and make it more desirable for investment. Often, a retail center has one or more ancillary multi-bay buildings containing smaller tenants. One of these small units is termed a commercial retail unit (CRU).
The demand for retail space has many drivers. Among them are: location, visibility, population density, population growth and relative income levels. From an economic perspective, retails tend to perform best in growing economies and when retail sales growth is high.
****Returns from Retails tend to be more stable than Offices, in part because retail leases are generally longer and retailers are less inclined to relocate as compared to office tenants.****
Industrial Property
Industrials are often considered the “staple” of the average real estate investor. Generally, they require smaller average investments, are less management intensive and have lower operating costs than their office and retail counterparts.
There are varying types of industrials depending on the use of the building. For example, buildings could be used for warehousing, manufacturing, research and development, or distribution. Some industrials can even have partial or full office build-outs.
Some important factors to consider in an industrial property would be functionality (for example, ceiling height), location relative to major transport routes (including rail or sea), building configuration, loading and the degree of specialization in the space (such as whether it has cranes or freezers). For some uses, the presence of outdoor or covered yard space is important.
Multi-family Residential Property
Multi-family residential property generally delivers the most stable returns, because no matter what the economic cycle, people always need a place to live. The result is that in normal markets, residential occupancy tends to stay reasonably high. Another factor contributing to the stability of residential property is that the loss of a single tenant has a minimal impact on the bottom line, whereas if you lose a tenant in any other type of property the negative effects can be much more significant.
For most commercial property types, tenant leases are either net or partially net, meaning that most operating expenses can be passed along to tenants. However, residential properties typically do not have this attribute, meaning that the risk of increases in building operating costs is borne by the property owner for the duration of the lease.
A positive aspect of residential properties is that in some countries, government-insured financing is available. At the expense of a small premium, insured financing lowers the interest rate on mortgages, thereby enhancing potential returns from the investment.
Source: Investopedia / Bluewaters2u
Links: http://www.investopedia.com/#axzz1ZYVOQzN7
Blue’s Comments:
Income-Producing and Non-Income-Producing Investments
There are four broad types of income-producing real estate: offices, retail, industrial and leased residential.
What these real estate investments have in common is that there are one or more tangible real estate properties underlying each investment. That means when you make an investment, it is important to consider the characteristics of the underlying real estate because “the performance of those properties will impact the performance of your investment”.
one of the most important criteria (aside from location, location, location!) is the type of property. When considering a purchase, you need to ask yourself whether the underlying properties are, for example, residential homes, shopping malls, warehouses, office towers or a combination of any of these.
***This is very important when deciding what Real Estate Investment Market you you want to Invest in prior to making your move to purchase…
Multi-family residential property generally delivers the most stable returns, because no matter what the economic cycle, people always need a place to live.
Stay tuned for Exploring Real Estate Investments: Characteristics Of Real Estate Investments Part 4 coming soon..Blue
The most basic definition real estate is “an interest in land”. Broadening that definition somewhat, the word “interest” can mean either an ownership interest (also known as a fee-simple interest) or a leasehold interest. In an ownership interest, the investor is entitled to the full rights of ownership of the land (for example, to legally use and transfer the title of the land/property), and must also assume the risks and responsibilities of a landowner (for example, any losses as a result of natural disasters and the obligation to pay property taxes). On the other side of the relationship, a leasehold interest only exists when a landowner agrees to pass some of his rights on to a tenant in exchange for a payment of rent. If you rent an apartment, you have a leasehold interest in real estate. If you own a home, you have an ownership interest in that home. Some jurisdictions recognize other interests beyond these two, such as a life estate, but those interests are less common in the investment arena.
As a real estate investor, you will most likely be purchasing ownership interests and then earning a return on that investment by issuing leasehold interests to tenants, who will in turn pay rent. It is also not uncommon for an investor to acquire a long-term leasehold interest in land, which then has a building constructed upon it. At the end of the land lease, the land and building become the property of the original land-owner.
Private Versus Public Markets
When you are planning your real estate investments, one of your first tasks is to decide what kind of exposure to the real estate market is appropriate for your situation. Different exposures produce varying levels of risk and return. Your choice will also influence the means by which you will acquire the real estate.
The first type of market you could participate in is the private market. In the private market, you would be purchasing a direct interest in one or more real estate properties. You would own and operate the piece of real estate yourself (or through a property manager), and you would receive the rent payments and value changes from that investment. For example, if you were to purchase an industrial building that was leased to one or more tenants who pay you rent, you would be participating in the private real estate market. You could also participate in this market by purchasing properties with any number of partners – this is known as a pool or syndicate.
Alternatively, you could choose to invest in the public real estate market. You would be participating in the public market if you purchased a share or unit in a publicly traded real estate company, such as a real estate investment trust (REIT). If you buy a real estate security, you are investing in a company that owns real estate and manages it on behalf of the shareholders/unit-holders of the company. As a result, your exposure to the real estate market is more indirect. A real estate security usually pays a dividend or distribution in order to send the rent payments that it receives from tenants to its shareholders/unit-holders. Any price appreciation or depreciation in the assets owned by the company is reflected in its share or unit price.
Equity and Debt Investments
In addition to choosing your market, you need to choose whether to invest in debt or equity.
When you invest in debt, you are lending funds to an owner or purchaser of real estate. You receive periodic interest payments from the owner and a security charge against the property in the form of a mortgage. At the end of the mortgage term, you get back the balance of your mortgage principal. This type of real estate investing is quite like that of bonds.
An equity investment, on the other hand, represents a residual interest in the property. When you are an equity investor, you are essentially the owner of the property. You stand to gain a lot when the property value increases or if you are able to get more rent for your building. However, if things should go wrong (for example, all your tenants vacate and you can’t make your mortgage payment) then the mortgagee, who has a priority interest in your property, may foreclose and you must forfeit your equity position to satisfy their security. In that sense, the risks of an equity position in real estate is much like that of owning stock.
The choice of whether you want to invest in equity or debt will depend upon your risk tolerance and your return expectations. The riskier choice is investing in equity, but you can also make a lot more money! As the greater the risk, the greater the reward.
The Investment Selection Matrix
Now, let’s put it all together.
Once you select your market and decide whether debt or equity investing is appropriate, it becomes apparent what type of security to buy or investment to make. Take a look at the following diagram:
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A. If you choose quadrant A, Public Equity, you should purchase real estate securities such as standard equity REITs or publicly traded real estate operating companies.
B. If you select quadrant B, Private Equity, you should buy direct, ownership interests in real estate properties.
C. If you choose quadrant C, Public Debt, you would purchase a mortgage REIT, a mortgage-backed securities (MBS) or (Commercial Mortgage-Backed Securities (CMBS).
D. If quadrant D, Private Debt, is most appropriate, then you would lend money to purchasers of real estate, thereby investing in mortgages.
Source: Investopedia /Ian Wovchuk, CFA / Bluewaters2u
Link: http://www.investopedia.com/#axzz1ZYVOQzN7
Blue’s Comments:
The choice of whether you want to invest in equity or debt will depend upon your risk tolerance and your return expectations. As the greater the risk, the greater the reward.
When you are planning your real estate investments, one of your first tasks is to decide what kind of exposure to the real estate market is appropriate for your situation.
Stay tuned for the next Blog in this series called “Exploring Real Estate Investments: Types Of Real Estate. Part 3
Chances are, when you think about investing in real estate the first thing that comes to mind is your home. For many people, their home is the single largest investment they will ever make. But have you ever stopped to consider that once you purchase a home it becomes part of your overall portfolio of investments? In fact, it’s one of the most important parts of your portfolio because it serves a dual role as not only an investment but also a centerpiece to your daily life.
Though a home is one of the largest investments the average investor will purchase, there are other types of real estate investments worth investing in. The most common type is income-producing real estate. Large income-producing real estate properties are commonly purchased by high net-worth individuals and institutions, such as life insurance companies, real estate investment trusts (REITs) and pension funds.
Income-producing properties are also purchased by individual investors in the form of smaller apartment buildings, duplexes or even a single family homes or condominiums that are rented out to tenants.
In the context of portfolio investing, real estate is traditionally considered an “alternative” investment class. That means it is a supplementary investment used to build on a primary portfolio of stocks, bonds and other securities.
One of the main differences between investing in a piece of real estate as compared to stocks or bonds is that real estate is an investment in the “bricks and mortar” of a building and the land it is built upon. This makes real estate highly tangible, because unlike most stocks you can see and touch your property. This often creates substantial pride of ownership, but tangibility also has its downside because real estate requires hands-on management. You don’t need to mow the lawn of a bond or unplug the toilet of a stock!
Source: Investopedia / Bluewaters2u
Link: http://www.investopedia.com/#axzz1ZYVOQzN7
Blue’s Comments:
Lets discuss the rationale for adding real estate to your portfolio. See my Next Blog on under Investment 101 Tab ” Exploring Real Estate Investments: What Is Real Estate?
Because this is such a huge and broad area for discussion, I am going to break this down in more than one section under Exploring Real Estate Investments..I will call this Part 1.
Quote from above: ” One of the main differences between investing in a piece of real estate as compared to stocks or bonds is that real estate is an investment in the “bricks and mortar” of a building and the land it is built upon. This makes real estate highly tangible, because unlike most stocks you can see and touch your property. This often creates substantial pride of ownership, but tangibility also has its downside because real estate requires hands-on management. You don’t need to mow the lawn of a bond or unplug the toilet of a stock!”.
Whether you’re ready to open your first discount brokerage account or simply wondering if you’re getting the best service for your money from your current one, here are 10 things to consider.
1. Trading commissions
Surprise! Cheaper is not always better. We know you’ve probably figured that out, but the price per trade at a discount broker may also indicate the level of customer service that comes with it. If you aren’t trading in and out of stocks very often (and you shouldn’t be), and you’re not too concerned about whether your trade is executed within 15 seconds or two minutes (and you shouldn’t be), there really isn’t a significant difference among the brokers charging $7 to $20. If you go much cheaper than that, you may have trouble getting someone on the telephone to answer any questions you may have. And if you’re paying much more than that, you should expect near-flawless service.
2. Other fees
You’ll get a good idea of what we find important as far as additional fees are concerned in this comparison chart of our broker sponsors. Beyond the trading commissions, you’ll find that brokerages may charge other fees, including fees for transferring assets into the account, fees for closing an account, IRA custodian fees, wire transfer fees, account inactivity fees, annual fees, and fees for not maintaining a minimum balance. If you know your needs, you won’t end up paying for services you don’t need.
3. Minimum initial deposit
If you’re just starting out, consider what you’ll be able to comfortably invest initially. Some brokers have account minimums, so find the one that best fits your budget. We have more on this topichere.
4. Customer service
For Fools, customer service is a biggie. If nothing else, you should put some time into researching a broker’s service before you sign on the dotted line. In the case of discount brokers, customer service includes website performance and interface. Check out each brokerage’s website. Is the interface intuitive? Can you find what you’re looking for without having to click 65 links? Is it speedy? If talking to a live human is important to you, test their phone service. Does the brokerage answer the phone promptly? Is there an office nearby, just in case you need to talk face-to-face? (Not everyone does, but if that’s important to you, put it down on your checklist.) You’ll definitely want to see how the brokerage does at sending you all relevant material you ask for online.
Finally, check out The Motley Fool Discount Brokers discussion board for invaluable insight into the praise and complaints being put forth regarding each of the major brokerages. It’s an active board, with many strong opinions. Understand that those with complaints are more likely to post their thoughts than satisfied customers.
5. Traditional banking services
This might not be tops on your list, but if you want to consolidate your PINs and pennies, think about looking for a brokerage account that can accommodate your banking needs. Many brokers now offer:
Your cash will typically attract higher interest rates in a brokerage money market account versus the typical savings or checking account. Check out our banking area for more details.
6. Research
Some brokerages market their research as a real plus. That’s fine, but you probably don’t want to pay for it. There’s plenty of research available on the Web (including right here at Fool.com). Some of the offerings include analyst reports, real-time quotes, and detailed financial data.
7. Mutual funds
No-load mutual funds can be purchased directly from mutual fund companies, so unless you’re a mutual-fund trading addict, the availability of thousands of mutual funds in one location probably shouldn’t affect which broker you choose. While you may purchase some no-load mutual funds from discount brokers without paying a transaction fee, some brokers do charge a fee for funds — so be sure to check on this before making a purchase. And, of course, if there’s a particular mutual fund family that you’re set on using, make sure that the brokerage you select offers that family of funds.
8. Investment product selection
All the brokerages offer stocks traded on the major exchanges, and most will offer equity mutual funds. But there are a number of other investment vehicles that you may wish to use. If you’re interested in risking your hard-earned moolah on over-the-counter (OTC) bulletin board stocks (shame on you!), you’ll have to see which brokerages offer them. Other choices such as options, government bonds, corporate bonds, and the like are not available through every brokerage. Determine what you expect you’ll need — we’re fans of just plain old stocks, especially if you’re young — and act accordingly.
9. Other methods of getting your trades executed
What if the Internet breaks? We’d all probably get a bit more exercise and sun now and then. Seriously, though, sometimes you may not have access to a computer. Check out whether the brokerages you’re considering also have touch-tone phone trading, and how that works. Sometimes you just might want to place an order through a real, live person, and many discount brokerages offer that option, too.
10. Other freebies and perks
We wouldn’t suggest making too big a deal about the freebies. After all, they are one-time things, and $100 or a new Koosh ball probably isn’t going to be worth the hassle if you soon find that you’ve made the wrong choice and have to move your account elsewhere. Still, free money is free money (and Kooshes are a great way to relieve stress). So if you find yourself deadlocked on which brokerage to go with, cash (or some other perk) can be a persuasive tiebreaker.
Finally, remember this: If you’re only making five, six, 10, even 20 trades in a year, the difference between paying $7 per trade and $20 per trade isn’t significant. We think it’s better to make customer service a priority and not sweat about most of the other stuff. After all, how much did you ever worry about which bank to open your first checking account with? The differences are about the same.
Source: Motley Fool
Link: http://www.fool.com/investing/brokerage/10-ways-to-size-up-a-broker.aspx?source=ih2sitlnk0000001
Blue’s Comments: While trading on a ETrade, Scott Trade or TDWaterhouse platforms, they can give the Day trader a certain amount of independence built within their trade pic’s..But, lack the service end that a Charles Schwab or JP Morgan can give you through their Wealth Mangers/Brokers..If your a no-non sense trader like myself that does need the Tools of a full Blown Service minded Broker …Then I highly recommend the above Platforms for Trading…Remeber..it is all about you and your money no matter What platform you choose..good luck guys..Blue
Thoughts from around the Globe..I agree with the comments on getting excellent service and don’t sweat the other small things…I maintain multiple accounts and depending upon what trade I do, I use the account that is best for that…it might help if all of the brokers and banks were to strive to have a similar front-end interface. If you switch brokers, it takes a while to navigate these, and this learning process is a huge inhibitor, especially when you include banking and Bill Pay systems and ALL of the data you frequently must re-enter.
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Another Brick in the Wall: The Fed is Twisting Your Arm to Do These 2 Things Costas Bocelli |
In the Fed’s widely anticipated policy statement yesterday afternoon, the FOMC announced another round of monetary easing to try and jump start the struggling economy.
After admitting that the current economic conditions pose “significant downside risks” to the recovery, the Committee reached the decision to alter the composition of their $2.9 trillion balance sheet:
In what has been named “Operation Twist” from a similar measure taken nearly 50 years ago, this tool is designed to reduce long term interest rates, which essentially makes the cost of capital cheaper for businesses and consumers to boost borrowing and spending.
The Fed has been under enormous pressure and scrutiny over the last several unorthodox attempts at easing monetary policy, particularly the last two rounds of Quantitative Easing (QE1 and QE2), which bloated the balance sheet to its current level. The side effects have had a profound impact on consumers because of sharp increases in inflation and prices.
Not only have nearly 30% of the voting members on the Committee officially dissented to additional easing measures, but the Republican leadership in Congress made their feelings known by sending a stern letter ahead of this meeting to the Fed Chairman warning not to engage in further easing for fear of higher inflationary conditions.
So it appears as if there won’t be a QE3 anytime soon, unless the economy takes a severe turn for the worse. The markets were sorely disappointed by this revelation, as they tumbled nearly 3% after the announcement yesterday afternoon, and are off to an even worse start today as I write this.
Aside from the portfolio shift further out along the yield curve, the Committee did make another compelling change to policy:
This is clear evidence that the Fed is trying to do everything possible to “twist the arms” of the American consumer — particularly those who’ve been sitting idle on the “white picket” fence — to go out and grab their piece of the “American Dream” and buy a home.
In their last policy statement in August, the Fed implicitly pledged to keep short term rates low until 2013, which also drove down longer term rates further out along the curve. Last month’s actions dropped mortgage rates to historic lows.
Yesterday’s reading on Existing Home Sales showed a month over month jump of almost 8%, to an annualized rate of 5.03 million homes sold.
Now, instead of reinvesting the proceeds from maturing mortgage backed securities directly into Treasuries like they have been doing, they will reinvest the proceeds directly back into mortgage agency debt (Fannie and Freddie), which should squeeze mortgage spreads to tighten and lower residential mortgage rates even further.
The Fed is indeed doing everything that it can to boost the housing market while not increasing the balance sheet.
I would not be surprised to see the average 30-year fixed mortgage rate being quoted below 4.00% as early as next week.
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