Commercial real estate a smart investment

Thursday, June 09, 2011 11:48 AM

(Source: Tulsa World)trackingBy GARY FLEENER

What if I told you that I had an investment opportunity for you that increases your net worth four ways, would keep up with inflation, could be bought with mostly borrowed money and was capital-gains-tax-free? If you dismiss the idea, you are passing up an opportunity that lending institutions, the Internal Revenue Service and the American economy are only too happy to help you with.

Commercial real estate can make money four ways: depreciation, principal reduction, cash flow and appreciation.

Imagine a tenant paying you money that pays your mortgage (principal reduction) with a little left over for your pocket (cash flow).

Now imagine the IRS giving you a tax break each year that you own the property (depreciation), and with each year of ownership, the property has a strong potential to appreciate in value.

Finally, imagine never paying capital gains tax on the property (1031 tax deferred exchange). In fact, paying capital gains tax on commercial real estate is voluntary. As long as you continue to use the proceeds of CRE sales to buy another property, the tax is deferred.

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People tend to focus on the physical property when thinking about commercial real estate. What is important is the actual or potential income stream generated by the property. If the property is already leased, then an analysis of the quality, quantity and duration of the income stream is where the initial research should begin.

A good investment would be a quality deal such as a QuikTrip store with an annual lease rate approaching 9 percent of the selling price and a lease term of 15 or more years. If the property is vacant, then the income stream would be an estimate, would have higher risk, and therefore a lower sales price.

Obviously, this is just the beginning of the research necessary to make a good real estate investment, but it is a lot easier than pouring over the latest statistics and Securities & Exchange Commission filings of Microsoft or General Electric. And what have they done for you lately, anyway?

The primary criticism of commercial real estate as an investment is lack of liquidity. Other types of investments can be sold quickly into a large market. This ability to sell quickly with each negative news pronouncement has cost investors a lot of money. However, although inflation tends to hurt stocks and bonds, commercial real estate yields can rise with inflation.

So, why not invest in something that’s here in Tulsa?

Tulsa has a stable, better-than-average economy. We have aggressive, profitable banks that are well-managed by veterans of the lending debacle of the 1980s. Tulsa also enjoys a 22-year accelerated depreciation schedule for commercial real estate while most of the U.S. must depreciate over 39 years.

Today, in Tulsa, we have bank interest rates that are lower than the historical average, favorable loan terms and reasonable return rates. Add to that inflation adjusted income, and tax-deferred capital gains, and you have an investment for the ages.

Gary Fleener is managing broker with Fleener Minnix Real Estate Inc. He is a past president of the Oklahoma chapter of CCIM and the Oklahoma chapter of the Society of Industrial and Office Realtors. Fleener was named Commercial Realtor of the Year in 2003.

Originally published by GARY FLEENER Business Viewpoint.

(c) 2011 Tulsa World. Provided by ProQuest LLC. All rights Reserved.

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About dherries
Dave and Sally Herries and The RealtyColorado Team - Real Estate Broker serving the metro-Denver area. Offering properties in urban, sub-urban and rural areas. Our mission statement is "Enriching lives through real estate."

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