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Aspen Daily News: “One of the Best Times in 100 years” to Invest in Real Estate

by Bill Small, Special to the Aspen Daily News
Monday, August 27, 2012

Over the past few years, we’ve heard mostly negative things about owning and investing in real estate. Whether it’s residential real estate where values declined 30 percent to 50 percent from the mid-part of the last decade in many parts of the country, or commercial-investment real estate that’s been impacted negatively by the Great Recession, the news would make most people shy away from considering real estate a viable investment. Even lenders, who have historically liked real estate as an asset to lend against, are acting very cautiously toward people who are interested in real estate investments.

Although caution is the current rule when it comes to real estate investing, this may, in fact, be one on the best times in the last 100 years to buy real estate as an investment.

Over the past century, stocks have returned an average of 11 percent annually. Over the past five years, the return on stocks as measured by the Dow and other stock indexes have been a disappointing zero. The Dow average was 13,057 in August of 2007 and closed this past week at 13,158. Even less exciting are the returns on currently available fixed investments. Short-term CDs and government bonds range from less than 1 percent to 3 percent for long-term U.S Treasury bonds and to less than 7 percent for corporate junk bonds.

By comparison, a good real estate investment, properly structured, can produce overall annual returns ranging from the low to mid-teens for the best and most conservative investments, to higher returns in the 20 the percent-plus range for more entrepreneurial investments. In addition, tax benefits unique to real estate can add to those returns. Depending upon what type of real estate investment you purchase and how you structure the investment, you could also expect anywhere from a 3 percent to 15 percent relatively safe annual cash flow return on your equity invested.

The risk and return from a real estate investment can vary depending upon the type of property from land, residential homes, multi-family apartment buildings to commercial retail, office and industrial properties. Depending upon where we are in the economic cycle, an investor can choose an appropriate investment option. At this point in time, it appears that the residential home market has bottomed and is starting a recovery phase. The National Association of Realtors reported this week that July existing home sales were up 2.3 percent from June and 10.4 percent from a year earlier, making July the fifth consecutive month of improving sales. This could signal the beginning of the next price appreciation phase in the residential market and a good opportunity to invest in single-family homes in high-growth areas and resort markets with great appreciation history, such as the Aspen-Snowmass area.

Real estate also has the benefit of being an investment that has been historically a good hedge against inflation. As a hard asset, real estate typically increases in value as the value of currency declines. Since the early 1980s, the United States has been in a historically low inflationary environment. Many investors believe that inflation is likely to return in the near future as a result of the stimulative monetary policy of the Federal Reserve as well as the world’s other central banks. The escalation of gold prices is proof of the fear of returning inflation. Real estate offers the same type of hedge against inflation, while at the same time delivering current cash flow.

As investors look into the future and available investment options, a well-located real estate investment could be a great alternative to stocks, bonds and gold. With mortgage interest rates at historically low levels, and the real estate market likely at the bottom of its value cycle, it could be a great time to consider a well-structured real estate investment for your investment needs.

Why Buy Now?

The answer to the question in this title is pretty straightforward – not only are large acreage recreational property values lower than they have been in almost ten years, an abundance of quality tracts are also currently on the market.

The first thought that this response most likely evokes from a prospective buyer is, given the current uncertainty with the economy, the smart play is to wait, let prices continue to drop, then pull the trigger on that dream property. This scenario sounds simple enough – why would anyone want to buy right now?

Although the odds of finding that perfect property at a very reasonable price are high right now, this window of opportunity will not last forever. Land prices will eventually bottom out and start the recovery process. Even more important than the recovery of land prices to a potential buyer is the inevitable reduction of quality tracts on the market. Once land prices stabilize, the first tracts to go are sure to be the best ones. By waiting for land prices to continue falling, a buyer is risking an opportunity to purchase a quality tract at a great price that probably has not been on the market for a long time and most likely will not be on the market again anytime soon.

The purchase of a large acreage recreational tract is typically a substantial long-term investment which requires much deliberation. The main objective for a majority of buyers is getting a great deal on a track that meets all of their requirements. Many buyers are currently hesitant to move forward in the purchasing process and this hesitancy is justified by the uncertainty of land prices recovering.

“Agricultural land values saw the largest percentage declines of the century in the early 1930′s, the beginning of the Great Depression. Agricultural land values dropped 37 percent over a period of 3 years and remained between $30 and $33 per acre throughout the 1930′s. Following the Great Depression, land values were revitalized and began a climb that continued until the early 1980′s.”

Over the last three years, the majority of large tracts of recreational property in upstate South Carolina have been losing value. Overall, these properties are currently pushing a 30 percent loss in value since land prices started declining. An increasing number of recreational properties currently on the market have experienced major price reductions that reflect this 30 percent loss in value. A legitimate argument is the current recession has lasted longer than anyone anticipated and we are close to a recovery but it will be a slow one. If this argument proves true a valid assessment of current land values is that although they have bottomed out, the time frame for recovering value will be significant.

As the slow recovery reveals itself the transactions on quality recreational tracts will increase in frequency as buyers gain more certainty that land values are increasing. Therefore, the best time to get serious about purchasing a large acreage recreational tract is now.

The substantial inventory of nice recreational properties with values 30 percent below pre-recession values will not last long and continuing to wait could very well result in missing out on the chance to purchase that ideal tract at a great price.