Where to invest is a question on many people's minds today. Many are seeking to mitigate risk and avoid the costly mistakes of the past while still owning a lucrative investment. As such, a growing debate has emerged about where best to place capital. Although some would dismiss real estate as too costly; closer inspection reveals a well of opportunity.

Let's say you were looking to invest in either Walgreens bonds or real estate earlier this year (Walgreens rated BBB by Moody's). A 10yr issuance that was done in March of 2009 has maturity date of 2019. It pays a coupon of 3.10% and is priced at $94.10; you would receive a yield to maturity of 3.87%, and an annual yield of 2.31%.

Now let's look at an opportunity to purchase a brick and mortar store that Walgreens would lease from you. The lease runs through 2024, and property is for sale at $8.833Mil.

We'll set the period of observation to 10 years and assume no increase in value. Said differently, we'll sell the property for what we paid for it, and the bond will just be redeemed for its face value. Also, to keep the playing field level we aren't going to use any leverage, just cash.

In this example, the property would receive a 59% higher return over the bond. It achieves both a greater yield and cash flow for the same amount of money invested. Some of this is due to the tax benefits of depreciation expense, but even in a world without taxes the property still outperforms the bond. The risk profiles of the two investments are also virtually identical in that Walgreens is the guarantor of both streams of income. All things being equal if one had to make a mutually exclusive investment decision between the two choices the answer is obvious.

Instant Insights /

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