According to the experts at National Realty Investment Advisors, real estate is the way to go for investors looking to make good in 2014. They are not the only ones who think so, either. According to a recent report from Bloomberg, U.S. millionaires see real estate as the single best alternative asset class to own in 2014.
“About 77 percent of investors with at least $1 million in assets own real estate, according to a survey released today by the New York-based investment bank’s wealth-management unit,” the article reports. “Direct ownership of residential and commercial properties was the No. 1 alternative-investment pick for 2014, with a third of millionaires surveyed saying they plan to buy this year.”
Dan Hirshout of National Realty adds, “This is something that many investment experts won’t tell you, because they do not stand to make any commission on real estate trades. For those who are interested in truly fruitful investments, though, realty should not be overlooked.”
Why Real Estate?
These comments from National Realty Investment Advisors aside, what is it that makes real estate such a superior choice for investors? Bloomberg notes that real estate markets are looking particularly positive right now, rebounding even as fixed-income yields remain historically low and equities surge. “U.S. commercial-property values rose 8 percent in the 12 months ended Jan. 31, and have jumped 71 percent since hitting their post-recession bottom in 2009,” the article notes.
Meanwhile, an article from Forbes makes note of a few things that make for particularly good real estate transactions. Art Scutaro, Senior Project Manager of National Realty, summarizes: “If you’re looking into real estate investments, you need to make some smart preliminary choices about the properties you buy. If you can buy under market value in good neighborhoods or find experts that really know how to do this for you , you will find that real estate investment can be wildly advantageous.” Or, as Forbes puts it, “You need to make some smart choices upfront when buying investment property.”
Fair Cash-on-Cash Returns
The Forbes article suggests that a good real estate investment is one that pays a fair cash-on -cash return. When a property is purchased, it means that the investor is taking money out of his or her more liquid financial assets. In other words, the investor is using money from stocks, bonds, or CDs and investing in real estate, which is an illiquid asset.
“You were earning a rate of return on your financial assets, such as 4 percent, and you should strive to earn a fair cash-on-cash rate of return on your real estate,” the Forbes article notes. “To do this, you need to pro forma your deals and buy cash flow-positive properties that earn you decent returns – not those prize properties that are negative, negative, negative.” “All true,” says Adam Levine, Assistant Project Manager at NRIA, “and we are glad to say every one of our projects throws off an 8-18 percent cap rate return – many times a bank CD or Corporate Bond fund!”
Considering the Risk
Another thing to look out for in real estate investments is the level of risk. Ideally, of course, investors will want to pick something that is not too risky. “All real estate has some risk, and there are always things that can go wrong, but this is more true of other asset classes like stocks and bonds that can have wild fluctuations as well,” Rey Grabato, Sole Managing Member of National Realty Investment Advisors notes. “If there is no risk then there is no reward, so the trick is to select the real estate deals that have slightly lower risk profiles, more built in equity, higher rents, better neighborhoods , tax perks like abatements if they exist, and professional management.”
Which real estate investments are these? “Development of real estate, land, Tenant-In-Common (TIC) investments, private real estate funds, REITS etc., all have much higher risk profiles than just simply buying a nice established Single Family Residence cash flow investment property,” the Forbes article states. In many cases, “Investors who choose real estate options other than single families end up losing money, simply because there are so many ways in which things can go wrong in financial markets or without complete hands on professional management” says Hirshout, Senior Project Manager.
For those who wish to invest in real estate while minimizing—if not altogether avoiding—risk, Forbes recommends a different approach. It advocates for “simply taking fee simple title in your own name – or an entity you wholly own – to the properties you purchase. In addition, you must do the proper due diligence, analyze, test, review reports, etc., to make a lower risk real estate decision.” “Fortunately,“ says Grabato, “these are the only types of deals National Realty does.”
Time is Money
A final consideration for the real estate investor is that money is not the only commodity being invested; time is also something that investors must pour into their investment, in the form of maintenance and management. This can effectively slash profit margins, especially for properties that require a great deal of maintenance and management—like college rentals, vacation rentals, and rentals in unsavory parts of town.
“It’s the nice, boring, wholly owned, in good shape, cash flow-positive properties that are the best investments,” Forbes advises. Grabato says the same – “That’s good old fashioned safe high yield NRIA properties.”
A Better Deal Than Wall Street
What all of these factors point to is that real estate is a safe high return investment when done right and investors must exercise prudence in separating the good real estate investments from the questionable ones. “When real estate investment is handled properly, however, the results can far surpass anything available on Wall Street” says AJ Scutaro, NRIA Assistant Project Manager. “Our clients and I have seen it over and over on hundreds of successful NRIA projects.”
“You have more control over making sure the investment is a success, you pay fewer commissions and fees, and you’re ultimately able to choose advantageous properties and make them work for you,” Grabato concludes, for National Realty Investment Advisors—“It’s a no brainer with the right advisor.”