Residential REIT’s – Is Now The Time To Buy?
The Dynamic Wealth Report
February 6, 2009
Should You Be Investing Here?
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.
Aspen was beautiful, as you can see from the picture above. 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.
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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.
• Barrick Gold (ABX) was upgraded to a “Buy” at UBS. Strong gold prices will prove to be a boon to the company.
• Hecla Mining (HM) was downgraded by Argus. Precious
metals are starting to move higher, and the company just completed a big
financing… this analyst may be dead wrong.
• Citigroup started research coverage on MGM Mirage
(MGM) with a “Sell” rating. The stock’s at a new 52-week low. Why bother
covering the company?
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