The key to successful investment real estate is understanding risk. All investments by their nature have risk associated with them. Understanding investment property risk can be especially daunting if the investor is trying to transition into an asset class they are not familiar with. 2

Given the recent 10-year investment cycle (1991-2001) in the San Francisco Bay Area, the first 5 year-period through 1996 was in aggregate deflationary for income investment properties purchased or refinanced from the previous inflationary period1986 through 1991. The last 5 years (1997 through 2001) was an inflationary period with rents/values in aggregate increasing on properties because of high demand for space related to the Tech-Boom economic expansion. Given existing lackluster demand with negative net absorption in the San Francisco Bay Area and given very high vacancy rates, the next five years will result for many property types deflationary pressures on rents/values for investment properties in aggregate. There will be exceptions. Some properties will not experience deflationary pressure in rents or investment sale prices because they have long-term leases backed by quality tenants occupying the entire property or are a ‘one-of-a-kind’ superior location property. 4

Investment property real estate can be very illiquid when economic uncertainty is high. For example: buyers typically acquire income property if they project Earnings, Before Interest, Taxes, Depreciation and Amortization (EBITDA) being stable or having upside potential. Buyers will be out of the market if EBITDA growth is uncertain or has

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Investment Properties