How Much is the Pursuit of High Yields Costing You?
I’d like to introduce you to an investment strategy in which you can achieve a reasonable cash yield and significantly increase your overall returns, all while decreasing your risk exposure.
Many private investors tend to overemphasize the cash flow potential of a property and place a much lower emphasis on the accumulation of capital and wealth potential that the asset provides. This is in direct contradiction to the thought process of the large-scale institutional investor. In this current market of low cap rates, and even lower inventory, private investors are looking to smaller markets, less desirable areas, and lower-class properties in an attempt to chase “yield”. By focusing on monthly cashflows, these investors lose sight of the big picture and, in turn, realize lower overall long-term returns in comparison to investors with a more comprehensive investment strategy. Class C properties in smaller markets trade at higher cap rates than their large market class A and class B counterparts, which translates into higher initial cash on cash yields. However, rents for these class C properties increase at a lower rate than the higher quality properties. Additionally, class A and class B properties appreciate at a significantly higher rate.
This chart illustrates the difference in value growth between high quality properties in major markets and lesser quality properties in smaller markets. The data is courtesy of Real Capital Analytics and their extensive research of property pricing values over the past two economic cycles.
Throughout the last two economic cycles, quality investment properties in major markets have appreciated significantly more than that of class C properties in non-major markets. Each $1.00 invested in a non-major market property in 2000 would be worth $1.79 today, while that same $1.00 invested in a major market property in 2000 would be worth $2.81 today. Due to their broad economic base and concentrated population, major markets have much greater value potential as compared to their small market counterparts. This value potential, combined with their greater historical stability, makes these major markets a superior location for investment. Furthermore, Class A and B properties in larger markets boast superior tenant rosters, filled with companies which are less sensitive to economic cycles than the typical tenants of Class C properties.
What would a 57% increase in your portfolio’s value look like?
How well is your portfolio situated to weather the next economic downturn?
Please contact me (Jeremiah Wilgus) to discuss the answers to these questions, and to explore which markets and property types are prime for growth in 2018 and beyond.