Dividend yield or cash flow is the total annual cash distribution an investor receives divided by the price paid by the investor. For example, if an investor paid $50 and receives an annual cash distribution of $2, you divide $2 by $50 to find the dividend yield of 4%. The most important consideration for an investor seeking current yield is to determine if the cash distributions are from earnings or the balance sheet or some bookkeeping entry. Cash distributions should be the product of earnings. Unfortunately, too many investors focus on the dividend yield percentage and nothing else.

Why Income Property?

Income property’s proprietary characteristics don’t fit the mold of a sound investment. Income property has a fixed number of clients (a building has only so many lessees); investors want businesses with large potential client markets. Income property is capital intensive; investors don’t want capital intensive businesses. Income property is a single-revenue business; investors don’t want the risks associated with a non-diversified revenue stream. Income property revenue is market-driven; investors want businesses that are in control of their revenue stream. Income property is valued on a yield basis; most investors want businesses that are valued on their earning growth.

Given this investment description, where does real estate fit in? Unfortunately, because real estate is a yield-valued asset, it can be a frustrating investment experience in a marketplace where more emphasis is placed on hope and speculation.

Given these objections, the product (space) of the income property business still provides the essential needs for our society to function. Income property provides space for people to live, work, and shop. In other words, the product of income property is essential for our society to function and provide an adequate quality of life. This is an extraordinary advantage for the business of income property. Given this huge product advantage, the investor still has to find the right area, select the correct property type, negotiate a fair price, perform good due diligence, finance it properly, and then manage it in a superior manner.

Today’s fast paced technological society may cause certain types of income property to change their lessee profile. Even in our new technological society, income property space to conduct business (i. e. storage, shipping, maintenance, manufacturing, etc.) will still be required. These changes open the door to new income property opportunities.

Finally, the fact that the value of income property is determined by operating yields (capitalization rates) and cash distributions offers investors exceptional clarity for understanding their investment. Operating yields and cash distributions give investors fair pricing and a predictable downside. Solid cash distributions validate an investment, are emotionally gratifying, and provide a reasonable return while waiting for the marketplace to recognize intrinsic value. Putting income property in its proper perspective, we see that a well-selected real estate investment is a very smart buy today – for tomorrow.

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