Real estate investing is not nearly as complicated, financially burdensome, or time consuming as you might think. In fact, Its easy to add raw land, shopping centers, apartment complexes, and private homes to your portfolio without brokers, bankers, attorneys, and handymen on your payroll. Even better, the zero overhead approach allows you to blend your real estate investments into your securities portfolio for ease of management, income monitoring, diversification, and analysis.
I know you think that the entire real estate market is in a shambles, and that it is far too dangerous to get involved now, what with all the nasty uncertainty that has decimated property values. But where did the real damage take place, and why? Without having mega millions to work with, or a line of credit that goes around the block, you can have positions in various forms of Real Estate without accumulating debt, paying insurance, or leaving your PC--- and you can get it done on the cheap!
All of the basic types of real estate are available through CEFs (Closed End Funds) and REITs (Real Estate Investment Trusts), and both can be purchased in the same manner as any common stock. Additionally, you can own a piece of the action without the big commitment of time and resources. Finally, you can take advantage of changes in the real estate market cycle in precisely the same manner as you can deal with the volatility and fluctuations in the stock and fixed income securities markets.
CEFs and REITs are obviously safer investments than outright purchases of shopping plazas, condominiums, and private homes. They are also considerably less risky than owning the common stock of individual real estate companies. The size of the numbers may be less exciting, but the net income and capital gains potential are comparable on a percentage basis, and the turnover rate can be much more impressive. Both types of real estate based security belong in your investment portfolio--- but in which asset allocation bucket?
I've always included REITs and real estate CEFs in the income bucket of my portfolios because their primary purpose is to generate cash flow. And, as with any interest rate expectation (IRE) sensitive security, I expect prices to fluctuate with changing conditions in several areas: IRE, credit market conditions, economic cycles, stock market cycles, etc. After a huge rally in any market, investors need to be more selective than they generally are. Common sense isn't real common when it comes to investing.
All financial markets, all investment securities, and all economies are cyclical. Equities, real estate, gold, and pork bellies--- it doesn't matter. If you buy too high, you will only get lucky if you know how (not when) to sell, and if you have a plan for doing so. Up side selling disciplines are scarce in most investment strategies... pity, they work so well with bargain hunting during crashes.
The income bucket of the investment portfolio is different in both purpose and content from the equity side. Real estate is an important diversification tool that may add some pizzazz to an otherwise boring collection of securities. We don't need to own the real estate to benefit from both the yields and the cycles. Unlike other fixed income assets (corporate, government, and municipal contracts), rents generally rise over the course of time. Mortgage interest is almost always higher than bonds provide, and we don't need to be mortgagors or landlords to get a piece of the action.
The speculators whose properties became termite infested as the latest real estate bubble burst were owners of mortgaged properties that could neither be sold nor afforded. The other losers were lenders to unqualified property speculators and, of course, the wizards of Wall Street who regulators allowed to turn simple mortgage debt into multi-tiered financial quagmires. Every bursting bubble produces two things: pain and opportunity. When the going gets tough, the smart investor goes shopping.
There are dozens of REITs and managed income CEFs that are worthy of your confidence and attention. Some detailed analysis will reveal lower than normal prices for higher than usual yields based on monthly payouts that have not been reduced throughout the tailspin in the real estate and financial sectors. Read that again--- monthly payments and higher yields throughout the downturn--- hmmm.
Now don't just run out and buy all of these things you can find, and stay far away from new issues for all of the usual reasons. Make sure that you look at a lot of REITs and even more CEFs of various kinds to get a feel for the levels of income they produce. Most of these securities are "leveraged" to a certain extent, which simply means that management may choose to borrow some of the money that they invest.
Leverage is not a four-letter word when used properly, and (in my opinion) it is more likely to help your results than it is to hurt them. But it's always a good practice to stay within the normal income range, assuming that there is either a risk or a management reason for the highest and lowest yields, respectively. Be careful not to create a poorly diversified income portfolio. Bonds, Preferred Stocks, Royalty Trusts, etc., all deserve income bucket representation.
The major distinction between the two types of investing needs some re-emphasis. When purchasing stock in a real estate company (or any other company), your main objective should be to sell the stock for a reasonable profit as quickly as possible. You will then select some other stock and repeat the process. When purchasing a REIT or an income CEF, you are depending on the managers of these entities to generate income and capital gains that they pass on to you.
You buy these securities for the income, but always recognize that you have the bonus capability of selling your shares when they rise to an acceptable profit level. Similarly, be prepared to add to your holdings during market value downturns, thus increasing your income and reducing your cost per share at the same time. The benefits of this form of real estate investing vs. ownership of the properties themselves should be clear. It's a whole lot easier than flipping properties.
So when it comes to Real Estate, think: no attorneys, no debt, and no maintenance equal no problem.
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