Retirement Ready Income Programs

Real Estate Investing: No Lawyers, Debt, or Plungers

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Real Estate investing is not nearly as legally complicated, financially burdensome, or time consuming as you might think. In fact, it is easy to add raw land, shopping centers, apartment complexes, and private homes to your portfolio without brokers, bankers, attorneys, and a Rolodex full of maintenance professionals' phone numbers.

Even better, you can blend your Real Estate investments into your security portfolio for ease of management, income monitoring, diversification analysis, etc. 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 (commercial, industrial, residential) at the same time, and focus either on growth opportunities, income production, or a combination of the two.

If you thought that Real Estate was out of your investment reach because of limited funds, or minimal personal experience, you were selling yourself short. 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.

And for me, this has always been their (CEFs and REITs) single most attractive feature. You can own a piece of the action without the big commitment of time and resources. 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 income security markets.

Real Estate CEFs and REITs are obviously safer investments than outright purchases of shopping centers and apartment complexes. They are also somewhat 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 --- the turnover rate is much more impressive.

Both methods (of participation in the Real Estate market) should be considered as you add to your investment portfolio --- but to which asset allocation "bucket"? I've always included REITs and Real Estate CEFs in the income bucket while the common stock of a plain vanilla Real Estate company would properly fit within the equity portion.

When adding equities of any kind to your portfolio, you should avoid the standard "mob popularity and greed" model and select only S & P, B+ or better, rated stocks that pay dividends (regardless of size) and that are priced at least 20% below their 52 week highs. After a huge rally in any market, I would be even more selective than that from a percentage standpoint, and I would buy about one-half the normal position to facilitate average cost reduction later.

You must establish a reasonable profit-taking target on any investment. Real Estate is no exception. No matter what the investment, Virginia, the longer and stronger the rally, the steeper and faster the correction is likely to be. (And this was written well before the 2007 - whenever debacle.)

On the Income side of the portfolio, 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. REITs must pay out a certain percentage of their earnings, but CEFs may not have the same restriction. I believe that either can be "leveraged", 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. 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, mortgages, etc. deserve your attention as well and should be represented. Monthly income is available and more attractive than any other.

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. It is likely that you will return to the same companies over and over again, and you are the manager --- any dividend income is gravy.

When purchasing a REIT or a Real Estate CEF, you are depending on the managers of these entities to generate income and capital gains and to pass it on to you every month, recognizing that the actual amount may vary slightly over time. You have the bonus capability either of selling the REIT or CEF shares when they rise to an acceptable profit level (more gravy), or of buying more shares to increase your income level.

The distinctions (benefits?) of this form of Real Estate investing vs. ownership of the properties themselves should be clear as well. No attorneys; no debt; no maintenance; no problem.

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Risk Management: Income, 401k, and IRA Programs

Take a tour of a professional investment managers' private SEP IRA program during ten years surrounding the financial crisis:


In developing the investment plan, personal financial goals, objectives, time frames, and future income requirements should all be considered. A first step would be to assure that small portfolios (under $50,000) are at least 50% income focused.

At the $100,000 level, between 30% and 40% income focused is fine, but above age 50, the income focus allocation needs to be no less than 40%... and it could increase in 10% increments every five years.

The "Income Bucket" of the Asset Allocation is itself a portfolio risk minimization tool, and when combined with an "Equity Bucket" that includes only Investment Grade Value Stocks, it becomes a very powerful risk regulator over the life of the portfolio.

Other Risk Minimizers include: "Working Capital Model" based Asset Allocation, fundamental quality based selection criteria, diversification and income production rules, and profit taking guidelines for all securities,

Dealing with changes in the Investment Environment productively involves a market/interest rate/economic cycle appreciation, as has evolved in the Market Cycle Investment Management (MCIM) methodology. Investors must formulate realistic expectations about investment securities--- by class and by type. This will help them deal more effectively with short term events, disruptions and dislocations.

Over the past twenty years, the market has transitioned into a "passive", more products than ever before, environment on the equity side...  while income purpose investing has actually become much easier in the right vehicles. MCIM relies on income closed end funds to power our programs.

To illustrate just how powerful the combination of highest quality equities plus long term closed end funds has been during this time... we have provided an audio PowerPoint that illustrates the development of a Self Directed IRA portfolio from 2004 through 2014.

Throughout the years surrounding the "Financial Crisis", Annual income nearly tripled from $8,400 to $23,400 and Working Capital grew 80% $198,000 to $356,000.

Total income is 6.5% of capital and more than covers the RMD.

Managing income purpose securities requires price volatility understanding and disciplined income reinvestment protocals. "Total realized return" (emphasis on the realized) and compound earnings growth are the key elements. All forms of income secuities are liquid when dealt with in Closed End Funds. 

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Please read this disclaimer:
Steve Selengut is registered as an investment advisor representative. His assessments and opinions are purely his own and do not represent the views of any other entity. None of his commentary is or should be considered either investment advice or a solicitation of business. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be or should be construed as an endorsement of any entity or organization. The reader should not assume that any strategies, or investments mentioned are any more than illustrations --- they are never recommendations, and others will most certainly disagree with the thoughts presented in the article.