what is investment?
Investment is spending on capital goods by firms and government, which will allow increased production of consumer goods and services in future time periods. Be careful not to confuse the economists's definition of investment with another interpretation - that investment involves putting funds into financial assets such as stocks and shares.
The chart below shows the annual percentage change in capital investment spending in the British economy since 1975. You can see that investment demand is quite volatile from year to year. Indeed in years of economic recession, the real value of investment spending can fall quite sharply because businesses decide to postpone or cancel investment projects.
Investment spending across the UK economy has increased (in real terms) in each of the last eight years partly because the economy as a whole has enjoyed a period of sustained economic growth. Service industries have enjoyed the lion's share of this spending on capital goods, but we have also seen large scale increases in capital expenditure in new economy sectors such as information technology and communication industries.
Commercial Real Estate Investment Decisions
WEIGH YOUR RISKS CAREFULLY
When you decide to embark on a commercial real estate investment program, how do you get your start? We know that there is no such thing as 100% financing for commercial property, so where do you get your initial capital for that first purchase? One method which I have discussed before is to use Other People’s Money as your initial “stake.” Perhaps having partners is not the path you wish to follow in your investment program. That makes the other option using your own funds. Before you dip into your resources, however, consider some of the risks you face.
First, you are embarking on an investment program about which you have little practical experience. You may have read every book on commercial real estate investing ever printed and gone to every seminar ever produced in a hotel for a year, but you have no experience in the business. Do you really know what can go wrong? Do you realize what additional reserves you might need in case things don’t go as planned?
Second, consider the source of your equity. For most people who have done some real estate investing, they have probably focused on residential investment properties. Residential properties usually enjoy a large number of comparables to easily estimate value, financing programs for residential properties allow potential buyers to facilitate sales with little equity investment, and residential properties are usually less expensive, and therefore more accessible, to most people. If you are such an investor, then you probably have a pretty good pool of equity to tap. But how do you access it? Sell them outright and pay your capital gains? Sell them in a 1031 Exchange? Refinance them? Each option has its advantages and disadvantages.
Third, if you are like most people, your biggest chunk of equity is sitting in your home. There may be a great temptation to go get yourself an equity line, suck out the equity, and go buy a commercial property somewhere. Before you do, make sure to consider how the increased debt service of the equity line will affect your finances. Can you truly afford the payments if something doesn’t work out with your commercial investment? Yes, your commercial property will be producing income. However, the majority of that income will be used to pay its operating expenses and paying off the loan you arranged to acquire it. That doesn’t leave a lot left over for you in the initial years of the investment to pay down the equity line, which will most likely have a rate somewhere above the Prime rate (8.25% today).
The point is to consider your investment goals, your tolerance for risk, and your ability to live without the funds you are using for your commercial investment. Over time, your commercial portfolio should provide you with significant current income, a hedge against inflation, and net appreciation. You need to pay careful attention to how you structure your commercial real estate financing to minimize unforeseen risks and increase your chances of success. In your quest to achieve your commercial investment goals you need to carefully asses the impact of the financing decisions you make.
WANT TO USE THIS ARTICLE IN YOUR E-ZINE OR WEB SITE? You can, as long as you include this complete statement with it: ‘ “The Investment Property Insider” is published by Craig S. Higdon, a veteran commercial mortgage broker. He publishes the weekly e-zine and blog, http://www.InvestmentPropertyInsider.com, for commercial real estate investors, developers, and industry professionals. Visit the blog and get this free report: “The 7 Biggest Loan Mistakes Real Estate Investors Make And How To Avoid Them.” ’
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What is investment risk and how much risk should you assume? Simply stated, low risk investments are more stable, with a lower return on investment but more predictable activity. High risk investments can provide a much higher rate of return, but more likely to react with extreme highs and extreme lows, which includes an increased possibility of loss.
And not all investments are purely high or low, black or white. Varying degrees of moderate risk investments are also available. And, just as no single investment vehicle should be selected, no single risk level should be selected.
After you identify the proper risk level for the majority of your investments, also allocate some funds to both slightly higher and lower levels of risk. Diversify.
Your personal risk tolerance level needs to be identified before investing your first dollar. If you choose to seek professional investment guidance, all credible stock brokers or financial planners are aware of this. Their expert analysis will determine what your risk tolerance level is. Then they will work with you to find the investments best suited to your personal goals.
If you decide to not use a professional investment service, and do you homework first. It is especially important you understand how investment risk relates to your personal investment goals. Determining your risk tolerance is just one of several important factors which need to be examined and balanced.
First, consider how much money you have to invest, and also anticipate your future funding contributions. Plus, identify your target goal, exactly how much money will you need. Next, determine the time remaining to reach your goal. All these factors combined will greatly influence your investment risk decision.
Are you savings for your first home in five years, or possibly college education for your children? Or, like the largest group of investors, are you preparing for retirement?
For example, if you are in your early twenties or thirties and you want to start investing for your retirement, your risk tolerance can be higher, with a large percentage of your investment chosen from a high risk category. When your investment has periods of downward activity, you will have enough time to wait out market corrections. .
What if your time to reach that goal is more near future rather than long term? Examples would be move into that new home in five years or college education for your children in ten years. Then you may want to select mostly moderate risk investments.
If you are in your forties or fifties and investing for your retirement income, many serious factors need to be balanced. If you did start your investment program years earlier, you definitely want very low risk investment selections, and keep those funds as safe as possible. However, if you are getting a late start, you now have fewer years to reach your goal and will need a very different approach. As well as the need to diversify your investments to include some moderate levels of risk, you may also need to modify your goals. Consider investments with levels of return which are safely obtainable within your time frame.
Another important factor is the emotional factor, as to how you feel about risk. Again, this will have a major impact in determining your tolerance.
For instance, if you invested in the stock market and you watched the movement of that stock daily and saw that it was dropping slightly, what would you do?
Would you sell immediately, or would you watch your investment ride out the storm? If you have a low tolerance for risk, you would want to sell out. But if you have a high risk tolerance, you would let your money ride and see what happens. This is not based on what your financial goals are. This tolerance is based on how you feel about your money!
Again, a good financial planner or stock broker should help you determine the level of risk that you are comfortable with, and help you choose your investments accordingly.
Your risk tolerance should be based on what your financial goals, plus how you feel about the possibility of losing your money. All these factors are closely tied together. Then read and compare all you can about your selected investment, study the historical earning patterns and ratings, and years of operation. Become comfortable with your decision. If you do not feel completely secure in your own decision, definitely seek professional guidance.
by sadie jane
