2008 marks the first year when 78 million baby-boomers born between
1946 to 1964 start retiring. This is the first time in the US history
that there is so many people who will be eligible for AARP membership.
As a result, federal spending on retirement and healthcare --Medicare,
Medicaid and Social Security will increase dramatically. So how
will this affect you when it's your turn to retire and what should you
do now? Since it has never happened before, you don't have the
benefits of learning from the history. You just have to rely on
analysis, projections of experts, and sometimes just your own common
sense. Let's look at the big picture from 30,000 feet:
<br>
1- Uncle Sam is currently spending about $1.30 for every tax dollar he
collects. As of March 2008, the US national debt is over $9.38
trillion dollars or about $30,894 per citizen. Per the Government
Accountability Office (GAO) this kind of fiscal policy is
unsustainable. However, it does not take a rocket scientist to come
up with that conclusion. Just try to do that with your checking
account!
<br>
2- Government spending on health care alone could double by 2017 to
more than 2 trillion dollars a year as a result of baby boom
generation retiring and rising costs of drugs & medical expenses.
Americans are also living longer. As they get older, they also have
more medical problems: high blood pressure, cholesterol, diabetes,
Alzheimer (one out of eight baby-boomers will get it), and cancers.
And medicines baby boomers need are very expensive. For example, a
year's supply of Avastin to treat colorectal cancer associated with
old age costs $55,000.
<br>
3- On top of that, the US consistently imports more than it exports.
The trade deficit was $708 Billion dollars in 2007. So more and more
our money is going to the Middle East and China to pay for our
addiction to oil and imports. Do you know it's the first time in a
nearly a century that the US is expanding its railroads? Per the Wall
Street Journal, it has spent $10B since 2000 to expand tracks, freight
yards and locomotives; and planned to invest another $12B. One of the
primary reasons is to haul Asian imports to heartland cities.
<br>
So the government will have to spend more and more money that it does
not have. To put it simply, the problems are so large and a financial
crisis is inevitable. The question is not if but rather when the
tipping point triggering the crisis will happen. So to make sure you
will be least impacted by what is about to come, you will need plenty
of cash aside when you are retired.
<br>
If you work for Corporate America, you probably participate in the
401K plan which invests mostly in stocks/mutual funds and bonds.
While 401k is a convenient retirement plan for many as it allows
people to make a small monthly tax-deferred contribution, it may not
be the solution for everyone. Some people prefer to own more tangible
real estates with limited supplies that they have more control of
instead of just shares of stock. In addition, most if not all
financial experts agree that as you get older, you should reduce your
investment in the stock market due to its volatility. This article
discusses about an alternative plan to 401K and for a lack of better
name the "equity-of-my-home-is-my-retirement" investment plan.
<br>
There are several reasons why commercial real estate investment is a
strong candidate:
<br>
1- It is a fairly stable investment. This is an important factor as
investors want to make sure their equity is also preserved throughout
their retirement years. Unlike stocks, real estate investment is not
sensitive to market fluctuation which seems to get worse as the
internet is getting faster. Commercial real estate investment will
shield people from going through the emotional roller coaster as the
stock value widely fluctuates sometimes within a very short time. The
stock of the Bear Stearns, the fifth biggest investment bank in the US
is an example. J.P. Morgan Chase & Co. bid just $2 a share for what
was selling at $150/share in March 2007. While this kind of
performance is not typical, you definitely don't want to be in that
position when you are ready to retire. You don't see this kind of
dramatic volatility in commercial real estate.
<br>
2- It generates strong cash flow after paying the mortgage and all
expenses. Many people simply forget the very fundamentals: if your
investment generates more rental income than your mortgage payment and
expenses than you are in pretty good shape! To those who invest for
retirement purposes, this is another important criteria. In order to
retire you need cash as you won't be able get income from a job
anymore. Your social security check will most likely not sufficient
unless you are happy with bread and butter. For those who are still
working for corporate America, it gives you a second source of income
just in case. Besides, you never know you could be the most important
asset of the company one day and a dispensable asset the next!
Normally the closer to retirement, the more important the higher
income is to the investors. To achieve strong cash flow, investors
often look for properties where "cap rate" is higher than the interest
of the loan. Texas is an area where many commercial properties offer
8-9% cap rate and it is a good place to invest for strong income.
Commercial properties are like a golden goose that keeps laying eggs.
You can just eat the eggs, i.e. cash flow, without slaughtering the
goose, i.e. your equity, for meat.
<br>
3- It is an excellent hedge against inflation. As oil price is over
$100 per barrel, you will have to pay more on almost everything. In
addition, the US dollar is getting lower against most if not all
foreign currencies so imports (besides Big Macs, beverages and
cigarettes, is there anything made in the US anymore?) will cost
more. All these thing cause inflation to go up at least in the near
future. Commercial properties tend to hold values very well for two
reasons: strong cash flow and limited supplies. Besides, the leases
often have either fixed or CPI-based (Consumer Price Index) annual
rent increases so you should have a raise every year. As the rent
increases, the property value is more likely to remain the same or to
go up.
<br>
4- It gives you a wide range of landlord responsibilities options from
purely passive to active. Some single-tenant properties, e.g.
restaurants or pharmacies offer 20 years absolute triple-net lease
with no landlord responsibilities whatsoever. This means you don't
have to worry about looking for a new tenant for a long time. The
tenants maintain your property in first-class condition while all you
have to do is cash the rent check and pay the mortgage. This kind of
property is ideal when you are too busy or just don't want to do
anything. Multi-tenants properties, e.g. shopping centers normally
require you to at least spend time to manage the local property
manager to make sure all the issues are taken care off.
<br>
5- It also offers potential for appreciation. This may increase
dramatically the overall return of the investment. It is a more
prudent investment than residential real estate investment. Due to
strong cash flow, you don't have to gamble on appreciation to make
money and thus are less likely to invest on pure speculation. If the
property appreciates in value then your investment return is much
better. However, if it does not appreciate rapidly and thus you don't
get rich quick, your rental income is more than enough to cover the
loan payment. As a result, your property is less likely to be
foreclosed. So it's not a surprise that the default rate for
commercial properties is only four tenths of one percent, at least
five to ten times lower than that of residential rental properties.
Of course real estate properties are more difficult to sell compared
to 401k shares. This actually encourages investors to hold their
properties for long term investment and discourages them to sell
prematurely.
<br>
Below is a case to illustrate these principles:
<br>
The Smiths (name changed to protect privacy) had their own business
and lived in the fairly nice and expensive neighborhood in the San
Francisco Bay Area. They planned to sell their business and retired
in the next 2-3 years. They still wanted to maintain current life
style. Over the years, they had invested in real estate and had quite
a bit of equities in several residential properties. However, they
figured out these residential properties would not generate enough
cash flow for them to retire comfortably. They decided to exchange
these properties for ones with more income. They sold one of the
properties and netted about $1M.
<br>
While the Smiths were looking for properties with high rental income,
they wanted to make sure the investment also preserved their equity.
This meant they would need to invest in a somewhat stable and/or
growing area. This advisor suggested them to do a 1031 tax-deferred
exchange for a $2.825M Italian restaurant located in front of a mall
in the fast growing Atlanta metro. The financial information shows
the tenant is doing well now and expected to do well in the future due
to its highly-visible location. They applied for $1.8M 5-year fixed-
rate 30-year amortization loan at 6.95% interest rate. The property
generated $19,000 of net rental income a month after expenses (8% cap)
while the mortgage payment was $11,915. So each month, the Smiths net
over $7000 of cash flow. The tenant signs a 20 years absolute triple-
net lease in which there are no landlord responsibilities. Since the
lease had a 2% annual rent increase, the Smiths could expect to get
even more cash flow in the future.
<br>
<b>Conclusion</b>: Investing in commercial real estate for retirement
purposes is not a plan for everyone as it requires a large sum of down
payment. This article is intended to introduce a new paradigm in
retirement investment that is not promoted by Fidelity, Smith Barney,
eTrade or Charles Schwab for obvious reasons. If you have always
considered 401k, you may want to investigate further about commercial
real estate investment. Of course you will have doubts about it as
your friends, relatives, neighbors and co-workers know little or
nothing or never talk about it. They all seem to know everything
about residential real estate investment. Well, the problem is often
worse when people don't even know what they don't know!
<br>
<b>About the Author</b><br>
David V. Tran is the President and Chief Investment Advisor at
eFunding, Inc., a full-serviced commercial real estate brokerage,
commercial loan broker, property management, self-directed IRA
investment and syndication company in San Jose, CA. David is the #1
commercial real estate expert author in the US (out of 260+) on <a
target="_new" href="http://ezinearticles.com/?
expert_bio=David_V._Tran">ezinearticles.com</a>, a premiere internet
magazine. He is also Pensco Trust's (a major self-directed IRA
custodian) Preferred Professional. His website is <a target="_new"
href="http://www.efundingcom.com">www.efundingcom.com</a>.
He may be
contacted at (408) 288-5500. eFunding does business in all 50
states.
You are welcome to share this report, unedited and in its entirety,
with anyone you like. You may not remove this text. (c) 2008 eFunding,
Inc.
<b>Information in this article is reliable but not guaranteed to be
correct.</b>
<br><br>
<b>How to Invest In Commercial Real Estate for Retirement Income NOW
seminar</b>
<b>Where: </b>eFunding, Inc. 1340 Tully Road, suite 307, San Jose CA
95122
<b>When: </b>Saturday from 8:55AM to noon
<b>Contact: </b>Maria 408-288-5500 for schedule and sign up
<b>Cost:</b> FREE
<b>Web:</b> <a target="_new" href=" http://www.efundingcom.com/seminar.htm
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<br>
<b>Are seminars presented by someone knowledgeable?</b>
They are presented by David V. Tran, Chief Investment Advisor at
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author in the US (out of over 260)</b> on <a target="_new"
href="http://ezinearticles.com/?
expert_bio=David_V._Tran">ezinearticles.com</a>.
<br>
<b>So what's the catch?</b>
None. There are absolutely no obligations from attendees.
<br>
<b>How to Invest In Commercial Real Estate for Retirement Income NOW.</
b>
- Have you always invested in residential properties?
- Would like to invest in commercial real estate but don't know where
to start?
- Never thought about investing in commercial real estate?
- Need another source of income for retirement?
- Worry about volatility of the stock market?
If commercial real estate investment is a new territory for you, this
free 3-hour seminar will provide you with what you should know before
you invest:
- Commercial vs. residential investment properties.
- Commercial real estate terminology: cap rate, NOI, GLA, etc.
- Which type of properties should you invest? Shopping strip,
apartment?
- How to choose a good investment property.
- Investment return
- Where should you invest?
- Leases: gross lease, net lease, & percentage lease. Which one
investors prefer?
- Property Management issues.
- What you should know about financing for commercial properties.
- The offer process, due diligence.
<a target="_new" href="
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">Other companies </a> charge up to $5997 for a similar seminar!
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