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

downward pressure due to negative economic data in the subject’s market area or overall economic conditions. Income properties are an investment that can take years of financial hardship before recovering from a deflationary cycle experience. Many real estate investors lost their entire fortunes on income property investment alternatives over a ten year time period from 1987 through 1997. 5

The investment property financing you select is as important as the investment property itself. Banks will loan up to 100% of a property’s appraised value, making real estate a unique and powerful source of wealth creation. Creative financing for non-owner occupied properties can provide both immediate cash flow opportunities as well as long term gains through appreciation and leveraging. 6

FSP views its stockholders’ investment as a “secure cornerstone building block” of a larger financial portfolio. All of FSP’s investment properties are currently owned without permanent mortgage debt, so there is a low risk of foreclosure. Properties are purchased in established locations with significant surrounding in-place infrastructure. They are thoroughly examined before acquisition to assess any structural, engineering or environmental issues. FSP’s financial strength provides for all current and future capital needs, leasing commissions or extraordinary tenant improvements. Properties are purchased with an eye to long-term investing and their ability to perform well through all of the natural economic and business cycles that affect the broader capital markets. 7

Rein USA is an on line source for residential rental property and commercial real estate investment properties, income property financing, private mentoring, and 1031 exchange. In addition, the Rein Investor’s Toolbox features premier educational materials related to real estate investing, while The Rein Report offers up to date industry articles. 8

Understand your timetable: Although there are exceptional cases, in general real estate is not a liquid investment, and you can’t expect to sell your property or properties in a few days, or even in a few weeks. Often, sales can take a few months or more, although in hot real estate areas turnaround times may be substantially less. 9

Deferment of Capital Gains Tax - When you sell an investment property, if you made more money than you bought it for, that’s called your ‘Capital Gains’ and Uncle Sam will tax you on that gain. However, the government allows you to transfer that gain into another ‘like kind’ property by using a 1031 tax exchange. This allows you to bypass taxation by deferring the financial gain into your next investment. 10

Freedom from Management: tenants in common-triple net lease investment properties are managed by National investment property companies on the property owner’s behalf. With no more investment property to manage, you have more leisure time to relax or pursue other interests. 11

Understand your financial capabilities: It’s possible to make a lot of money in the Nashville real estate marketplace. But in order to do so, you need to understand your personal limitations. It is never a good idea to put yourself in a situation where you are a financial slave to your investment property. 12

The investor should consider the property value of the investment properties they are considering and the neighborhood they are located. A multifamily apartment unit located in the up and coming new neighborhood will give a better chance of getting a higher return on the investment. An apartment dwelling located in a declining neighborhood, on the other hand, has a slim chance of increasing anytime soon. The investor is more likely to get lower rents, more vacancies and less return on their investment. 14

Real estate is speculative as it is. Austin may be over-played at this point, definitely not an early discovery on your part. If you face a 10% tax penalty on equity plus the tax-deferred status, on top of the realtor commissions and out-of-town property management, just to buy into the game, you’ve got quite a disadvantage over all the other folks competing to make money there. down payment is highly leveraged — you’ll be underwater from the start so better have the cash and income to carry the property if it goes vacant or has a little mishap like termites or a flood, or else you’re going to take a bath if you have to dump it. 15

References

2. www.tm1031exchange.com
4. findarticles.com
5. findarticles.com
6. www.reinusa.com
7. www.franklinstreetproperties.com
8. www.reinusa.com
9. www.hummerhomes.com
10. www.greatinvestmentproperty.com
11. nnnpropertiesforsale.net
12. www.hummerhomes.com
14. www.propertymanagementblog.com
15. www.yelp.com