2 Options: Buy Investment Real Estate or just Buy REITs - Cabot Wealth Network

2 Options: Buy Investment Real Estate or just Buy REITs

Residential apartment blocks converging in the center

Buying investment real estate is the best way to take advantage of the current housing boom. But there’s an easier way too.

No question, the stock markets in 2020 and so far in 2021 have been very good to us. And as the owner of a small real estate company, I can also say that we have been very fortunate that—in spite of the coronavirus pandemic—2020 was a successful year for the real estate sector. And the future looks even brighter!

Realtors aren’t the only professionals who are seeing an optimistic future for real estate; so are some well-heeled investors. That’s according to Bloomberg.com, who just surveyed the members of Tiger 21—a network of wealthy entrepreneurs, investors, and executives with an average of $100 million in assets. The 850 members of Tiger 21 still love stocks—22% of their portfolios are in equities—but the largest percent of their holdings (27%) are in real estate.

Right now, they see industrial real estate as a hot market, due to online retail sales which are spurring the need for distribution centers. Additionally, companies are ponying up for workforce housing, which sometimes consists of converting limited-service hotels. But there is one more area of real estate that is thriving—rentals.

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And while the lack of inventory is driving up prices, making it tough for folks wanting to buy a personal home, it is creating opportunities for those interested in buying investment real estate.

The national vacancy rate for homeowner housing has declined to 1.0%, from an 11.1% high in 2009. And that creates a new avenue for real estate—investing in rental properties. COVID-19 has temporarily boosted rental vacancy rates—to 6.5%, from 5.7% in spring 2020—but that’s still a far cry from the 11.1% vacancy rate for rental properties in 2009.

The Attraction of Investment Real Estate

Rental rates have stabilized since the beginning of the pandemic, and in January of this year actually edged up 0.1%. The average long-term monthly 3-bedroom rental in my neck of the woods in Tennessee is around $1,650 per month—up $200 over a year ago. And that’s just the average. There are plenty that command more than $2,000 per month.

Folks rent for three primary reasons: 1) they are vacationing; 2) they are “trying out” a new area; and 3) they are building a new home and want to be close by.

There are two sweet spots for a real estate investor:

  • Short-term rentals to vacationers who want to enjoy the nearby tourist attractions, such as the Great Smoky Mountain National Park, near me.
  • Long-term rentals

Both of these rental markets are very robust. Right now, in my community, according to rental.com, there are 98 apartments and single-family homes for rent. And I can’t begin to guess the number of cabin rentals in neighboring Townsend, Gatlinburg, and Pigeon Forge. Just know that demand is high.

The cash flow from rentals can be enticing—especially with mortgage rates so low. At today’s rates (around 3%), you might finance 80% of a $300,000 home for around $996.00/month. Of course, you must include taxes, insurance and HOA. But, even with those added, you’re looking at a payment a bit north of $1,100 per month. The difference between monthly layout and rental income is attractive. And don’t forget, you can also depreciate rental property, which will improve those cash flow numbers, and help you save on taxes. Lastly, you would own an asset that actually makes money for you. But before you invest in rental property, please check with your accountant to determine whether owning rental property is right for you.

Bottom line, if the numbers looks right, and you’re looking for an alternative investment, consider buying a “real” asset that will increase your income and your financial security.

Or, are REITs the Way to Go?

Alternatively, if you don’t want to dive into the hard assets of real estate, there’s a fast and convenient way to become a real estate investor, and that’s by investing in Real Estate Investment Trusts (REITs).

REITs were created in 1960 by an act of Congress to allow individual investors to participate in the ownership (and profits) of large-scale, income-producing real estate properties. Like mutual funds, they allow individual investors to “pool” their monies to invest, while sharing the risk of the investments. They are also excellent tools when used to diversify your portfolio as well as to allocate your assets. And, as with mutual funds, they are professionally managed. But REITs have one tremendous selling point not shared by most mutual funds—high dividend yields.

By law, REITs must return at least 90% of their taxable income to their shareholders, annually, which generally translates to very nice yields for the REIT investor, making these investment vehicles very attractive.

Most real estate investment trusts (REIT) own, and usually operate, income-producing properties. There are three primary types:

Equity REITs primarily own and operate income-producing real estate, but have become diversified into additional real estate activities, including leasing, maintenance and development of real property and tenant services.

Mortgage REITs lend money directly to owners and operators of real estate or acquire loans or mortgage-backed securities. Many of them also manage their interest rate and credit risks using derivative strategies such as securitized mortgage investments and dynamic hedging techniques. Their best-known investments are Fannie Mae and Freddie Mac, government-sponsored enterprises that buy mortgages on the secondary market.

Hybrid REITs own properties and make loans to real estate owners and operators.

We often feature REITs in my newsletter, Wall Street’s Best Digest, so I scoured our archives to find a few that might be of interest to you. Here are three I recently highlighted, with comments from our contributors.

3 REITs to Consider

SL Green Realty Corp. (SLG), contributed by Ben Reynolds & Bob Ciura, Sure Dividend Newsletter

“SL Green owns commercial properties in New York. It’s in charge of nearly 100 buildings there, with a combined total of 41 million square feet between office and retail properties.

“Funds from operation (FFO) came to $1.75 per share in the third quarter, flat year over year. All things considered, flat FFO generation is by itself a notable accomplishment, considering the extremely difficult environment for both office and retail real estate to begin 2020.

“Same-store net operating income increased 2% yoy, and it maintained an occupancy rate of 94.2%. SL Green collected 96.9% of total billings for office, 70% of billings for retail and 92.6% of total billings for the quarter. This has helped the company generate positive cash flow, even in 2020, which has helped the company continue to reward shareholders.

“SL Green is a shareholder-friendly company. Not only does the company pay a monthly dividend, it also recently raised its monthly dividend by 2.8%. In addition to that, it also tacked on a special dividend of $1.6967 per share.

“In addition, SL Green separately announced a $500 million increase to its stock buyback authorization, bringing its total for repurchases to $3.5 billion. Considering the entire market cap is less than $5 billion, the share buyback will likely be a significant boost to FFO-per-share growth moving forward.”

Regency Centers Corporation (REG), contributed by John Buckingham, The Prudent Speculator

“Real estate investment trust (REIT) Regency Centers is a national owner, operator and developer of neighborhood and community shopping centers. The company has been in the business more than 50 years and has a portfolio that is primarily anchored by productive grocers located in affluent and attractive more-populated metro areas.

“Shares have struggled this year, as the pandemic hit retailers especially hard. REG reported receiving 86% of Q3 rent and has seen an uptick in new leases, while grocers, drugstores, banks, and home improvement tenants have been the strongest performers in areas where retailers were allowed to reopen. Management observed that there is a direct relationship between fully reopening shopping and rent collections, which while not surprising on its own, is indicative of the need for vaccines to be deployed quickly and widely (beyond the obvious health benefits).

“We believe that brick-and-mortar retail will continue to be important after the pandemic passes, while those that have converted to more online shopping will see their packages shipped from local stores instead of massive distribution centers.”

Broadmark Realty Capital Inc. (BRMK), contributed by Brett Owens, Contrarian Outlook

“Broadmark Realty Capital is technically a mortgage REIT, but the classification feels lacking given what the company actually does. Broadmark, which only started trading in its current form in 2019 after the Broadmark real estate lending companies merged with Trinity Merger Corp., is a “hard money” lender. It provides construction loans, heavy rehab/redevelopment loans, land development loans and more on everything from residential to commercial to industrial buildings, to builders—typically those that need a quick turnaround, allowing it to set fairly high rates.

“Core earnings declined from 21 cents per share in Q1 to 18 cents in Q2, and that remained level in Q3. It even had to reduce its monthly dividend by 25% to 6 cents per share starting in April. But existing inventory is tight, homebuilders are supremely confident, and there’s still no shortage of homebuyers—all bullish for BRMK.”

Whichever way you decide to invest in real estate, just make sure you do your homework. Then sit back and let the dollars flow in!

Nancy Zambell

Secure Your Financial Freedom

Nancy Zambell, Chief Analyst of the Financial Freedom Federation, has spent more than 30 years helping investors navigate the minefields of the financial industry. Nancy's book, Make Money Buying & Selling Stocks is an introduction for new investors and a reminder for experienced investors on how to profit in the stock market.

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