Residential REIT’s – Is Now The Time To Buy?

| February 6, 2009 | 0 Comments

Last issue I talked about part of my experience in Aspen.  While wandering the upper-crust, very wealthy city, I realized the recession was impacting everyone.  Normally the wealthy tend to sidestep the worst of an economic downturn… but this time it’s different.

If you didn’t get a chance to read that article, you can check it out here, “Is The Recession Now a Depression?”  At the end of the last issue I said I’d give some ideas on where to be investing.  And I will… in a moment.

But first, let me tell you more about Aspen.

The mountains had just received a light dusting of new snow, and the skiing was fun.  The nightlife was even better.  But I was there for something entirely different.

The attendees at this event are a special group.  We have CEOs, CFOs, Venture Capitalists, Investment Bankers, Money Managers, and even an attorney in the group.  You can insert your own “attorney joke” here.  I think these are some of the smartest people in their fields.  Everyone’s excelled at making serious money.

My goal on this trip is simple… to listen more than I speak.

Of course I ask a lot of questions.  Now, none of the participants seek out publicity.  As a matter of fact, they actually shy away from the lime-light.  They prefer to operate undetected – it makes their businesses more profitable!

I won’t be able to tell you much about their backgrounds.  But what I can give you is their ideas (and those are much more valuable).

Like the conversation I had late one evening over a very expensive glass of scotch…

I was sitting near a roaring fire.  The huge couch was just outside of the bar area (which was going strong well after midnight).  I was trading stories with an older gentleman who specialized in corporate consulting. That’s a fancy way of saying he turns around struggling businesses.

His specialty is identifying ways to make big money.

What interested me most was his focus on making money no-matter the situation.  He has a unique ability to turn liabilities into assets.  He uncovers the real value in a company.  As we talked about his experiences and successes, we stepped onto some interesting territory. He casually mentioned seeing tremendous value in real estate these days.

I was surprised.

As you know I’m not exactly hot on real estate these days.  Just read my article “So, Now What?” published just a few weeks ago.  I spoke of what’s going on in the real estate markets, how mortgage rates are the lowest point seen in generations, and how mortgage applications have spiked.  Yet I still wasn’t comfortable buying in to the homebuilder stocks.

My ears perked up and I set aside my scotch.  I wanted to focus on what he said.

His observations are simple and straightforward.  In his mind, because of the continued recession, the stock market is a risky place for investment capital.  He thought the market might fall another 20% or more… he wanted to avoid that risk.

His attention is now focusing on real estate.  The cost of buying a home had fallen considerably (as everyone with a roof over their head knows). The cost of financing real estate had fallen considerably as well (just look at recent interest rates).  That means buying real estate right now is a low cost investment.

But that’s not all.

Rents are stable.  At least in the areas he was researching.  Rents now cover the cost of owning real estate.  That’s a huge discovery.  Think of it this way.  After you buy real estate, your revenue is the rental income.  Your expenses are mortgage payments, interest, insurance, taxes and upkeep.

For the first time in years, your revenue now exceeds the costs.  Real estate is once again becoming profitable.

Because of falling prices and cheap financing, real estate is becoming fairly valued.

He continued to walk me through his logic.  If you can leverage yourself 5 to 1 (the equivalent of an 80% mortgage) and the income stream from the property covers your costs… shouldn’t you be buying?

I’ve got to admit, his logic sounded spot on.

Now remember, all real estate is local.  Investors need to “run the numbers” before making an investment.  If the numbers work out, investments like these can be very successful.

Now, I know what you’re thinking.

What if I can’t or don’t want to buy real estate?  Can I still profit from this observation?

Of course you can.  Now, I’ll admit, my conversation moved into other areas before I could ask my drinking partner these very questions.  But this is what I think.

A way to dip your toe into the real estate market is through some of the residential REITs.  These are investment vehicles that hold a large number of properties, diversified across the US.  As their rent rates hold up, they should perform well in a tough economic environment.

Two of the largest residential REITs are Equity Residential (EQR) and Avalonbay Communities (AVB).

Equity is run by famous real estate investor Sam Zell.  The REIT’s worth about $6 billion.  It owns more than 579 properties in 24 states.  The other residential REIT to look at is Avalonbay.  They’re about $4 billion in size and own 163 apartment communities.

As a REIT both will pay out a big percentage of their profits in the form of dividends.  They have nice yields, and should provide some good cash flow to investors.

Now, don’t expect an immediate home run from these ideas.  Some REITs are cutting dividends and slowing property development.  Commercial properties are starting to struggle… like malls.  If we really slip into a deep recession, all bets are off.  It might take a year or two for the mainstream real estate recovery to start… but once it does, the profits could be huge.

 

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Category: Real Estate

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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