Investing In Real Estate With REIT ETFs

The Dynamic Wealth Report
April 4, 2008

My Latest Trade . . . .

It never fails to happen. Every time I meet someone new the conversations eventually shifts. “So, what do you do for a living?” I’m tempted to respond with gas station attendant or professional coffee tester . . . but I don’t. “I publish a widely read financial newsletter.”

Then I wait cringing . . . here come the questions. “What are you buying in your account? Have you made any good trades lately? What tech / agricultural / financial company do I like the best? Do you trade options / futures / commodities? How are you doing vs. the market? Can you help me invest?” The questions don’t stop.

I really don’t like answering these questions.

First off, I work hard researching and analyzing different investment ideas. I expend a great deal of time and money (not to mention brain cells) figuring out the financial markets and how to best make money from them. I’m not going to blindly toss my best ideas to everyone I meet.

The other reason I hate these questions is the reaction I get. Some people will blindly follow any investment “tip” given to them. They don’t even consider if the advice is appropriate for their portfolio.

See, some of the investments I make are very risky.

Sometimes I’m shooting for a very high reward, and the money I have on the line is risk capital. If I’m right, I really rake it in. And if I’m wrong . . . well let’s just say it won’t change my lifestyle. I’m lucky. I’ve been very successful not only in my career but also with my investment portfolio. This allows me to take risks that may not be appropriate for other people.

The final reason I generally shy away from these questions is because of appearance. The financial publishing industry is filled with people who can’t wait to point a finger at you. They’re looking for any reason to accuse you of trading improprieties – justified or not. I have no desire to fall into that debate . . . . my greatest asset is my reputation and I will protect it at all costs.

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That’s why I always mention if I own something I’m writing about.

With that out of the way, let me tell you about a recent trade I made. Many of you know that I’m partial to real estate. My great-grandfather was a property manager in Chicago. During the great depression he worked with people all over Chicago to save their homes.

Further, my grandfather ran a real estate firm, also in Chicago. My father has owned, at one time or another, a variety of commercial and residential real estate. Now I own several rental properties and I’m always looking to add more.

To say real estate’s in my blood is an understatement.

I really like real estate as a long term investment. With a long enough investment horizon the right investments can be very, very profitable. The problem is not everyone has the time to go out and learn the market. Spending time looking at hundreds of properties, negotiating purchases, managing the financing, finding tenants . . . it can be a full time job.

So I found an easier way.

I am a believer of the “Buy and Hold” strategy for a portion of my portfolio. Sometimes I buy stocks that I have no real plans to sell. That’s right; I aim to hold them for 20 years or longer. I don’t find investments like these very often but I found one just a few days ago. I was researching various parts of the market when I uncovered a very interesting data point.

One of the largest REIT ETFs was yielding almost 5%

The iShares Dow Jones U.S. Real Estate Index Fund (IYR) holds a selection of some of the best REITs in the market. Its top holdings include: Annaly Capital (NLY) a mortgage REIT, ProLogis (PLD) which manages industrial distribution properties, Simon Property Group (SPG) which owns and operates a number of regional malls, and Vornado Realty Trust (VNO) managing almost 30 million square feet of office space.

Within the real estate market this REIT is well diversified. I noticed the price had retreated to the low $60s from a high of around $95 just 15 months earlier. And, it had a nice dividend yield.

Now, the real estate market has been hit hard. This may not be the bottom, but the stocks in that industry are trading at a big discount to where they were just a year or two ago. And things will eventually change in the real estate industry.

Might my investment go lower? Sure. But I’m willing to take that risk. I only invest a portion of my capital. I held back a portion. If IYR does go lower I can buy more. And if it goes higher, I may buy more too.

What are my expectations?

Remember I don’t care where this stock trades over the next few days, weeks, or months. I want it to provide a nice return over the next 10 to 20 years – and pay a nice dividend. So far it’s doing great. But I really can’t wait to see what it will be worth in 20 years.

• Bernstein upgraded both BHP Billiton (BHP) and Rio Tinto (RIO) to outperform. Apparently Bernstein just realized there’s a rally occurring in the commodity markets.

• KKR Financial (KFN) received a downgrade from Bear Stearns on April Fool’s day. The company, KKR, is suffering from the turmoil in the debt markets.

• BMO Capital Markets initiated coverage on Alcoa (AA), Alumina (AWC) and Century Aluminum (CENX). The companies received Market Perform, Underperform, and Outperform ratings respectively.

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