Tuesday, October 23, 2007

Commercial real estate: investing for your nest egg?

As always, there's a fine line between "investing for retirement" and "gambling." Today a trio articles caught my eye that seem to tie into a common theme, which is "you can make a bunch of money, but you can also lose your shirt. So do your homework."

First up is this happy article from the Springfield News Leader, which tells us about the "strong growth in the office and retail segments" and says that while there are some signs of slow-down there is no sign of any imminent crash.

Keep in mind that there are posts on this very blog from people who are very nervous about over-valued commercial real estate.

Does that mean that all CRE is overvalued or headed for a fall? Of course not. Like politics, all real estate is fundamentally local. It's the original case-by-case basis industry. A strip mall or office building might be a great deal even with a really low cap rate because of other factors. Similarly, an apartment building might have a terrific pro forma, but there are 6 out of 12 tenants who are sick of the winters in that building and are headed out as soon as their leases are up.

Following that article, I found this article which is both good and bad news: "The Federal Reserve will do whatever is necessary to prevent damage to the economy from the credit crunch that has gripped Wall Street...."

The good news about that statement, for entrepreneurs and people like me who help get money to entrepreneurs, is that interest rates will probably not take off like a rocket. The bad news is that there's a fairly clear signal that the underlying problems -- an overreliance on off-book collateralized debt vehicles -- may not be dealt with. Build assets now, my friend, and structure your debt wisely.

Lastly, Jeff Brown, a man I had the good fortune of talking to yesterday, has this article on his blog: the 401K as a Trojan Horse. 401Ks are sold to the public as a great way to avoid taxes. Guess what? You can easily blow yourself up with taxes using these vehicles. Read the whole thing, as they say.

What does this add up to? As the man said, God isn't making any more land. Real estate can be a terrific investment and it beats the heck out of relying on your 401K to save you by itself. However, in anything you do, you have to watch the fundamentals and make sure the math works for you, your particular risk tolerance and your particular situation.

No comments: