Investing in Property - Choices and Alternatives

Investing in property has long been seen as the ideal investment for earning long-term wealth. A vast plot of land bought for $50,000 in the 1950s could be worth as much as $10 million today, depending on the location of the property and other characteristics of the land.

Apart from anecdotes such as that above, property investment has been popular for numerous reasons, amongst which the ability to leverage and borrow at low cost and for its perceived lower correlation with the state of the economy. Leverage, in particular, is highly attractive to investors. For a million-dollar investment property, one needs to put down a small downpayment of 10-20% of the cost of the property (this varies depends on location-specific regulations). Along with this, we also observe that the cost of borrowing funds for property is far lower than the prime rate charged by banks for other collateralized loans. Investors leverage up to purchase the property, rent out the property and use the rental to repay the loan instalments. If all goes well, they own the property after 10 years.

2005-2006 has seen a boom for high end property in Asia, reminiscent of the heydays of the late 1990s.

However, one of the downsides of property investment in this form is the illiquidity of one's asset. In simple terms, this means that the piece of land or apartment or bungalow is not easily convertible into cash. Selling off an investment property would take easily more than a few weeks and it could be another few months before the transaction is completed and money is received in the bank.

there is no physical asset being owned, as the investor owns a right to the distributions of the asset, the sentimental among us might want to touch and feel a live physical building.

The other disadvantage of property investment is the indivisibility of the investment. One buys a condominium apartment; he or she cannot easily sell off 10% or 20% of the property to raise cash as there is no ready market for investments in this form.

In recent years, financial innovations have emerged in the investment space, providing investors exposure to property and overcoming the two disadvantages described above.

Real Estate Trusts - in some countries, this is called a Real Estate Investment Trust. In this structure, a company commonly purchases commercial buildings and takes over the management of rental and maintenance. The assets are then placed in a trust and units in the trust are sold to institutional and retail investors. The income received from the rental is then distributed to unitholders after deducting management fees and other relevant costs. Real estate trusts can also comprise residential buildings, but this is less common and higher risk as rental rates are more volatile.

The real estate trust enables investors to get in on property investment without having to come up with a large amount of money, as the units in the trust are usually bought and sold on a stock exchange. For as little as a thousand dollars, investors get to hold a share in a portfolio of property investments.

Trading on an exchange also enables units of the real estate trust to be easily exchangeable for cash, as these units trade frequently.

The other benefit of this structure is that yields are more easily projected due to the long term contractual nature of commercial leases. This is not necessarily true for residential property.

The one disadvantage of this, is that investors do not get the benefit of substantial leverage, nor do they enjoy the lower cost of borrowing that comes from buying a property.

Lately, we have seen unit trusts specializing in property investments. In most cases, the fund manager reviews the universe of investible property trusts and selects those that fit his criteria. A property trust might also comprise infrastructure trusts and shares in property development companies.

Such property trusts and property unit trusts have done well in the last year and are gaining rapid popularity. Time will tell if they continue to realize the early promise shown.

Michael Russell
Your Independent guide to Investing

Real Estate Investing: No Lawyers, No Debt, No Plungers

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 Investing 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 Fixed Income 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 and the turnover rate 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 Fixed 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 high. 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.

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.

Steve Selengut
http://www.sancoservices.com
http://www.valuestockbuylistprogram.com
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

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