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Archive for July 2013

Why Invest In Real Estate

Why Buy Real Estate?
Real estate ownership in most cases represents an active, tangible, non-perishable, asset as opposed to passive, intangible, and sometimes perishable, form of investment. What does this mean to the average owner. It means that you are in possession of and in control of a solid piece of property that is yours to do what you want with within the dictates of written and common law, and your personal means. Regardless of what the trends are in society or the economy, you will succeed or fail, as a result of the decisions you make as an owner and manager of real property. If you are an astute manager and have ample income or a source of wealth, real estate ownership can be a good tool for you to utilize to build and preserve wealth, mainly because you are in control of your property and can make your own management decisions.

How does real estate compare to other investments such as private equity or debt securities or (stocks, bonds, mutual funds, reits, annuities, bank CDs, etc.), or government debt securities (T-bills and bonds, munibonds, government backed bonds such as Farm Credit Bonds or Fannie Mae etc.) or commodities such as gold, silver, corn, soybeans, oil etc?



Private and government securities are intangible assets meaning they are not the physical asset, but a piece of paper like a stock or bond that states you own a certain share of a company or that a company or government entity owes you for a certain amount of debt. And they are passive in the fact that you usually have no say in the management of the entities you are invested in. The only decision making you are usually involved in, is to buy or sell these issues, and when to do so.

Securities are also divided into equities and debt issues. The meaning of this is that is the equities such as common stock give the holders a certain share in the net worth of the company. Bonds are debt issues in that the holder of these issues is owed a certain specified amount of money at the term of the note with a specified amount of interest being paid periodically or at the end of the term. The debt holders are the first to be paid and the equity holders have the resulting net worth as increased value of their shares of stock or decreased or no value if the company goes into financial losses. There is more risk with equity issues, but also more chance to greatly increase wealth if the investor chooses the right companies at the right time. Timing is everything when you deal with passive intangibles because you are dealing with no, or a minimal amount, of cash return and only appreciation or depreciation of values.

An investment in commodities such as gold, silver, corn, soybeans, pork bellies etc. is also usually an intangible asset in the fact that you usually don’t actually possess the actual commodity (unless you are a producer such as a farmer or mine operator a processor such as a meat packer or grain processor). Anyone owning commodities that are not the producer or processor are usually speculators, meaning you can only make money on the increase of decrease of the price of that commodity. Commodity investing is usually purely speculative in the fact that there is no dividend or interest paid for owning a commodity even if you would actually possess the commodity. You only make money on gold or pork bellies if you bought low and sold high on what is called a long trade or vice versa with short selling. There is another factor to consider with commodity trading and speculation in the fact that all the food type commodities are perishable and have to be consumed within a certain time frame for them to hold their value. Again with commodity investments Timing is everything because there is no cash return the investment and the gain or loss is strictly based on appreciation or depreciation of value.

As mentioned earlier real estate is a tangible asset meaning it is a real asset that you possess, not a piece of paper like a stock or bond that states you own a certain share of a company or that a company or government entity owes you for a certain amount of debt. Real estate is also an active investment in that you possess the physical asset and it is yours to manage and use for your enjoyment or financial gain. Timing plays a big role in real estate investments, but is not the only one as it is in other investments, because the opportunity to be an active manger with real estate gives an astute investor the chance to make the best use of property through the various trends. The main issue with real estate ownership, as with any investment, is that a person needs to own what is within their means. Getting in over your head where you can’t afford to make the payments and keep up on taxes and insurance is not where a person wants to be and this is the reason we are seeing so many foreclosures in the housing and commercial real estate markets at the present time. Financial leverage is a wonderful tool when the trend is going for it, but it can also be extremely hazardous when the trend goes south. I witnessed this concept first hand while farming and serving on the board of an agricultural mortgage lender in the 1980’s. When farm income and values slipped many overextended farmers were not able to service their debt and their net worth quickly plummeted below liquidity in many instances.

The first real estate investment for most people is their personal residence. When you own your own home you can surround yourself with as much comfort and beauty as your taste, talent, and budget will allow. Most people understand the wisdom of considering the location of the property and the trends taking place in certain neighborhoods when they invest and make improvements in a property. In a free market society such as ours we experience trends within almost any market, real estate being no exception, and it is wise to be aware of those trends ranging from the local to the global market. The best bargains can often be had in communities and neighborhoods that are stable or growing in size and improving in the quality of improvements. This can be in areas of new development or in older areas that are making a comeback for various reasons.

If a person wants to invest in income producing real property beyond their personal home, several options exist in real estate which can make you an active manager of a tangible asset. Here in the state of Iowa commercial farmland has always been a favorite of many investors. Another favorite of real estate investors has been rental housing. This could be single family housing or multifamily housing being anywhere from a duplex to a large apartment complex. Another real estate investment is commercial rental property. An advantage to commercial properties over residential is the fact that a commercial tenant is usually just renting the space and is responsible for their own maintenance of the property during the term of the lease.

Following this general discussion of various types of investments the next thing to address is where are we in the trends of each type of the various types of real estate investment? Just as in housing, the value trend of all real estate has been upward over time, but it is subject to many ups and downs given the political and economic environment of the times. Right now farmland is in a favorable position for 2 reasons; first producers are enjoying good income mainly because of demand for corn for ethanol and second farmland is held in very strong hands at this time meaning that there is very little debt involved in present ownership. Housing right now is taking a beating because just like the farmers in the 80’s, credit has been overextended in the housing market and the industry has taken the fall. It will take time to work out of this just as it did for farmland. Commercial real estate is in the same situation as housing at this time as far as overbuilding and too much debt extension. It too will have to work out of this by curtailing expansion and waiting for demand to catch up to inventory. Rental housing is also suffering at this time because of overexpansion and too much leverage in its ownership, but with the declining construction of new single family housing and new stringent lending standards, demand is catching up to supply for rental units, both single family and apartments.

The question of whether to invest in real estate and which type can only be answered by each individual given their needs, desires, and abilities. Everyone needs housing, but the question is does owning my own housing unit fit my present or future needs, do I have the means to purchase and maintain a personal property and do I want to do this? Also am I going to live in this particular location long enough to justify the expense of buying a place if I am going to have to sell or rent it in the near future. Commercial property is a tough situation at the present time for an investor, but if a person has a business that requires a commercial location ownership might be a good option if the property can be purchased on good terms and will cash flow with the business. Commercial real estate as well as farmland properties are investments that will only cash flow at this time with a very small or no debt load. Iowa Farmland just increased on average 24% in value last year and many think the bubble may about to burst again. If farm income lessens land prices will soften but a crash like we witnessed in the 1980’s won’t probably happen because of lack of debt involved with farm ownership at this time. Residential rental housing if purchased and managed right with less than total debt financing might be a good investment if a person has the desire and ability to deal with this type of investment.

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