Originally published in Press Democrat Sunday, October 12, 2008, in Local Perspective section
The financial Tsunami, building for many months, may have hit with its full potency when it swept over the market (and many of us) this month. The warm waters of the sub-prime mortgage cataclysm have been fueling the power of this devastating storm for a long time, and the liquidity carnage will be reverberating in lending industries for years to come.
The resulting financial uncertainty left in the wake of this dicey and complex financial maelstrom can almost be summed up in one sentence: "What do I do with my money?"
If there's a silver lining to the cloud of confusion gripping our collective attention, it is that we all must reexamine basic concepts of how we hold and invest our hard earned cash. What other safe, proven, yet innovative, wealth building strategies are out there for the prudent to consider?
One investment area that has kept below the radar of gloom and doom are selected niches in the world of commercial real estate. This isn't to say that commercial real estate hasn't been affected; it has. A retail real estate recycling process is in full swing, yet the majority of commercial estate's values have not been subject to huge market declines (more on this in another article). So where are the opportunities? What factors need to be considered?
It may be a good time to evaluate the "income to appreciation ration" in property you own to determine how the property cash flow is actually performing. Property owned for an extended period of time often has an appreciation value which eclipses the cash flow. In these cases, liquidating that asset and finding one which creates more income puts your equity to work for you and with tax-deferred benefits may be worth exploring.
Is it a sensible strategy to sell some assets and lock in profits? Maybe. Fortunately, the 1031 Tax Deferred Exchange Option remains a viable alternative for the sale of property held for investment. It continues to be one of the most reliable and secure vehicles for building wealth.
Will the capital gains tax be raised? Much chatter and speculation is afoot about the impact of the coming election and taxes. Currently capital gains taxes are at an historic low, hovering at 15% with current tax policies. This may (or may not) change with a new administration as they take aim at reducing the record deficit and paying the hefty freight for the sub-prime bailout; could be the time to lock in profits.
A NNN Leased Investment is a prudent hedge for securing cash flow, and still allows for the tax and appreciation benefits of owning real estate. Sometimes known as "coupon clippers," NNN Leased Investments require minimal management, and can be comfortable owned from afar, because the tenant is obligated to pay all the expenses associated with owning that property (taxes, insurance, and common area maintenance). They are much like a bond with a real estate component.
Mobile home parks, self storage facilities, and ground leases are real estate products which have monthly income in place, and as a rule, require less day-to-day involvement than multi-tenant investments such as apartments, retail and office complexes.
Real estate is a tangible asset, and cannot vaporize in a Wall Street shell game, quasi-legal Ponzi scheme, or be bundled in a complicated derivative of a derivative and sold on the Chinese stock market. Ninety percent of self-made wealth in the U.S. has been generated through real estate investments held over time. Market fluctuations can be waited out, and the risk to reward potential is substantial, yet secure. It is impossible to perfectly time the market, but it may be the time to do some research.