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Are There Greater Investment Yields in Real Estate?

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Brokers and Agents
Posted: 14 Dec 2012

For fixed income investors finding decent yields is a real challenge these days. Fixed income investments are yielding historically low returns. Currently, the 10-year Treasury bond, the benchmark for yield without risk, is at 1.72%, significantly below the long-term average yield for 10-year treasuries of 6.64%. Moody's aaa corporate bonds are averaging only 3.5%. Even 30-year rate mortgages are yielding an average return of only 3.32%.

In addition to this low yield environment, fixed income investors also need to be concerned about the potential of rising interest rates and the prospects of inflation over the next decade. If for example in the next five years, the yield on long-term treasury or corporate bonds increases back to their long-term average yields, the value of these bonds would lose roughly 40 to 50 percent of their value. With interest rates at historically low levels, probability suggests that the next trend in interest rates is likely to be upward either from an improving economy or rising inflation. So where can a fixed income investor look to find respectable yields without the significant risk of loss of principle value or the opportunity for a higher return on their invested capital? One good option is triple-net leased real estate. Triple-net leased real estate is typically commercial real estate leased to a single tenant that typically has a strong credit rating. This can range from smaller properties leased to tenants such as Family Dollar and Walgreens, to larger properties leased to tenants such as Wal-Mart or Target. Virtually every publicly traded company on the major stock exchanges leases commercial properties in some form or another and in most cases those leases are triple-net leases. In short, a triple-net lease is a commercial lease were the tenant pays a base rent, plus all the expenses related to the ownership of the building, including utilities, maintenance and often repairs to the roof and structure. The development or purchase of these properties is often financed non-recourse with the lender looking to the credit rating of the tenant and not the property owner. The deal structure of a typical triple-net leased property would be a long-term lease of ten to thirty years with the tenant paying a base rent of roughly seven to nine percent of the cost of the property. For example, it the property cost $1,000,000, the tenant would be paying a net rent of $70,000 to $90,000 to the property owner, and in addition, the tenant pays all the other costs of owning the property. In essence, the owner collects rent every month similar to an interest payment of seven to nine percent; and has virtually no obligation to be involved in any way with property management. A With little additional risk, the owner can leverage the property by obtaining a mortgage at interest rates in the 4.5% to 5.0% range and increase the current yield on the cash invested to 10% or 11%. In addition, triple-net leased properties typically have automatic base rent increases every five to ten years that protect the property owner from inflation. For those investors looking for better fixed-income investments, triple-net leased commercial real estate offers an attractive alternative. Instead of settling for the current corporate bond yield of a major corporation that might only pay 5% or less, you can buy a triple-net leased property that's leased to the same corporation at yields of 7% to 9%, and with proper financing increase that yield to 10% or 11%. In addition the underlying real estate will appreciate over the term of the lease resulting in an overall yield of the investment that could be 15% to