“It’s hard to make money in real estate. I can’t do it.”
Of course you can. Real estate, whether raw land or fully improved buildings, obviously has a function and will continue to. Real estate, in and of itself, is not subject to obsolescence. You know, like ambergris or Pets.com stock.
As long as people enjoy living, working and shopping on the earth’s surface, real estate in general will remain a handsome investment for somebody — regardless of whether the market is up or down. At least until we figure out levitation, which could be months away.
But public perception clouds everything. One staple of the local news in the past has been the sympathetic journalist interviewing the poor unfortunate who ended up in foreclosure, because he was mystified that adjustable-rate mortgages and fixed-rate mortgages are different things. So the population at large is now convinced that behind every real estate investment is an unscrupulous lender just waiting to take some nitroglycerin and a match to your life’s savings.
Two things:
- Read the contract. There’s a reason why although millions of mortgage holders owe more money on their houses than they’re worth, no lender has yet been forced to offer restitution to a gullible homeowner: because mortgage contracts are airtight. Instead, to appease an angry and idiotic public the government has taken to making changes by fiat.
- If that’s how you feel, why not be on the other side of the transaction?
Yeah, me. A real estate baron. Okay.
That’s exactly what we’re talking about. Via a handy creation called a Real Estate Investment Trust (the acronym, REIT, is pronounced “reet”).
It operates on the same principle as a mutual fund a fund manager creates an investment out of disparate pieces of other, more basic investments. In the case of a mutual fund, that means companies’ stocks, accumulated in differing proportions and sold to you and me in easily digestible chunks costing as little as $250. In the case of a REIT, a fund manager puts together real estate investments and lets you buy in.
This is not some new development. REITs have been around for more than 50 years. If you have a 401(k), there’s a 4-to-1 chance that you’re investing in one right now and don’t even realize it. (Wait, you mean you’re one of the people who actually does research to determine what’s in his 401(k)? Congratulations. Gold star for you.)
So with a REIT, I’m buying little pieces of all my neighbors’ houses?
Doubtful. Not quite. Particular REITs specialize in different market segments. For instance, some focus on industrial sites only — factories, warehouses and their ilk. Others invest solely in what are euphemistically called “entry-level” homes — mobile homes and starter apartment complexes. Some REITs even concentrate in market segments as arcane as storage facilities or medical buildings. (I’d link to examples of each one, but that means I’d run the risk of one of you investing his entire net worth in a particular REIT, losing every penny, then suing Len and me for making the hyperlink so tempting and easy to click on. It’s much easier to paint that scenario than to write an appropriately worded disclaimer.)
REITs even trade publicly, just like the mutual fund that comprises your 401(k) probably does. But unlike stocks and mutual funds, of which there are myriads upon myriads, REITs are less plentiful. Only about 200 REITs trade on the NYSE and NASDAQ boards, making REITs fairly easy to keep track of. There they are, on the ticker, right next to the ordinary stock quotes and index figures. There are a few private REITs as well, but they’re only for the extremely wealthy and the connected. Let’s just say that the people who buy into them aren’t reading about them here.
You know what a dividend is, right? An annual, quarterly, or — in rare cases — monthly cash payment that a company makes to its stockholders, just for owning the stock. Managers do this to make the stock more attractive compared to other stocks you might be thinking about buying: you can think of the dividend as just a consistent discount on the price of the stock.
Well, not only do many REITs offer dividends, the ones that do offer dividend yields about quadruple those of stocks. When you buy a REIT, ideally you’re more interested in receiving regular income payments than in watching your stock appreciate so much that you can cash out and spend the rest of your life floating in a pool and scarfing down bonbons. REITs are about generating regular revenue while everyone around you worries about the market value of their home.
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Greg McFarlane is a writer for Investopedia and lives in Las Vegas and Lahaina. He also runs ControlYourCash.com and is the author of Control Your Cash: Making Money Make Sense, a financial primer for people in their 20s and 30s who know nothing about money. Buy the book here (physical) or here (Kindle).
Photo Credit: BusinessToday.in
“Well, not only do many REITs offer dividends, the ones that do offer dividend yields about quadruple those of stocks that do.”
This is why it’s a good idea to put REITs in tax-deferred vs. taxable accounts.
Mortgage Rates Drop to All Time Low
Rates have been relatively low over the last month. This week, they are in the news by falling to a new all time historical low.
The 30 year rate fell from 4.75 to 4.69 this week. Two weeks ago the 30 year rate was sitting at 4.72. What’s interesting is that over the last month, when a lot of people have been talking about how rates are about to start rising, we are instead breaking records with mortgage rate lows. We mostly concentrate on the 30 year rate because it is the most widely used mortgage product. But in addition to the 30 year rate hitting an all time low the 3 other major mortgage products all reached new all time lows as well. The 15 year dropped from 4.20 to 4.13. The 5 and 1 year arms dropped from 3.89 to 3.84 (5 year arm) and 3.82 to 3.77 (1 year arm). Below are rates from the weeks from May 27, 2010 to Jun 24, 2010
Jun 24, 2010
30-fixed 4.69 15-fixed 4.13 5 ARM 3.84 1 ARM 3.77
Jun 17, 2010
30-fixed 4.75 15-fixed 4.20 5 ARM 3.89 1 ARM 3.82
Jun 10, 2010
30-fixed 4.72 15-fixed 4.17 5 ARM 3.92 1 ARM 3.91
Jun 03, 2010
30-fixed 4.79 15-fixed 4.20 5 ARM 3.94 1 ARM 3.95
May 13, 2010
30-fixed 4.93 15-fixed 4.30 5 ARM 3.95 1 ARM 4.02
So in addition to looking at mortgage rates it’s also helpful to look at mortgage payments. We took today’s rates and translated them into a mortgage payment for a 200k loan. We also did the same things with rates from May 13th.
Jun 24
30-year $1036.07
15-year $1492.43
5-year ARM $936.47
1-year ARM $928.5
May 13
30-year $1065.1
15-year $1509.62
5-year ARM $949.07
1-year ARM $957.13
So although rates were already pretty low on May 13th today a payment on a 200k loan is about $30 less a month for a drop of a little less than 3 percent.
So what is going to happen over the next few months? Its certainly possible rates could fall a little more and we could break some new records with mortgage rates. I would be surprised if rates fell below 4.25 unless the economy went into a significant tailspin. On the other hand once the economy recovers rates should increase rapidly. And in inflation spirals out of control I could see rates jumping into the double digits.
Real estate will always be a necessity, but in the next few years people will have to adjust to living in accommodations which suit their needs and not their wants. As a recent college grad, I have seen countless landlords buy houses and pay off their mortgages by renting out rooms to students. Each student has to pay a monthly rate for their room and utilities, so the landlord’s mortgage payments are paid effortlessly.
This brightend my day so can I brighten yours?
Software isnt released, its allowed to escape. 🙂
I love REITs and they are vital to my plan of buying a Tesla with passive income! My favorite is Realty Income (O), which pays dividends monthly.
Shaun,
I bought 500 shares of O back in 2005 when it was $23 a share. My IRA loves me for it. It was one of my better decisions. I’ll never forget their annual report with the cartoon characters. When 2008/9 rolled around, the centerfold of the annual report read, on the left page: Our Investment Philosophy Before The Financial Crisis, and on the right page: Our Investment Philosophy After The Financial Crisis. Both were the same list of principles.
When I temporarily worked with a financial adviser, he wanted me to sell it. I didn’t listen to him and now self-manage my investments.
The stock currently buys me 2 shares each month from the dividend reinvestment. I have about 540 shares and plan to continue this strategy for at least another 6 years. Woo-hoo!
Thanks for the article. I am happy to have a part of my portfolio in REITs. They aren’t a huge allocation, but in this yield-starved environments you rightfully point out REITs present a promising potential income investing opportunity.
Some dyslexics are too preoccupied to invest.
One I know is also an agnostic insomniac and he lies awake all night wondering if there is a doG.
“As long as people enjoy living, working and shopping on the earths surface, real estate in general will remain a handsome investment for somebody regardless of whether the market is up or down.” – Greg McFarlane
Len has written up the experiences of a number of us who have had exactly that experience, e.g:
http://lenpenzo.com/blog/id22017-how-i-live-on-less-than-40000-annually-ralph-from-west-virginia.html