Just got done reading the latest issue of Forbes - and I was excited to see a whole section on real estate investing. Unfortunately, I was disappointed once again by the mass-medias complete misunderstanding (maybe thats too harsh) of Commercial Real Estate. We'll correct some of the errors here, then its good reading.
Art. #1: Why REITS Make Sense:
http://www.forbes.com/forbes/2009/0803/real-estate-commerical-property-why-reits-make-sense.html
This isn't a bad article, only it fails to bifurcate real estate into its two components: residential v. commercial. They are not the same, not even close. So when the author states "[he] chuckles at how poorly he fared in his only direct property investments. He recently lowered the asking price on his four-bedroom Tudor house, which he built on 1.5 acres in 1983. If he manages to get the $385,000 he's now listing it at, the house will have returned 1.5% a year, not even keeping up with inflation. REITs generated average annual total returns of 9% over the same period" it's misleading. You can't compare the two, they operate on totally different fundamentals. Commercial real estate will outperform residential over every time period, simply because it is built to. People buy homes to live in them, not as an investment. The Author makes this mistake again in saying "Buy a $100,000 property and closing costs can easily run $3,000. Assuming you put down $20,000, that represents a one-way drag of 15%. Sell and your Realtor is likely to skim off a 6% commission. REIT operators absorb some of these same costs, but at least you can get in and out of their shares at their prevailing market value. The Simon REIT runs up overhead of 0.8% of assets annually; this is on top of operating costs (like janitors' salaries) of the sort that any property owner incurs." Again, this isn't apples to apples. I would think it would be more compelling to compare net lease investments (single tenant stores, etc.) to REIT investments if you want to compare direct investment to REIT investing.
The author also misses out on another key component of REITs versus direct real estate investing: REITs are invested in pools of properties. This diversification is a HUGE advantge. It means the investor is less exposed to a particular region, sub-market, tenant, or a number of other factors that can be road hazards to investors building their own portfolios.
I like the remainder of the article, it is compelling. Worth printing out and saving.
Art. #2: Rent Out Your Home. Cut Your Taxes:
http://www.forbes.com/forbes/2009/0803/real-estate-rent-residential-home-sweet-tax-break.html
This is a good article for people (like me) who decide not to sell a home they used to live in and instead rent it out. It cites the tax reasons for doing so, and albeit there are a couple of minor errors, it is a good representation. What I think readers need to keep in mind is that the changes to the tax code in 1986 were specifically geared toward thwarting the abuse of real estate tax benefits. Congress left many of the tax benefits for real estate professionals (like me), but put significant restrictions on passive investors. So, reader beware: Unless you make LESS THAN $100,000 per year, joint with your spouse, OR you are a real estate professional, your tax benefits will be significantly limited, most likely to zero. In my prior life as a CPA, I can't count the number of people I had to break this news to. I repeat, reader beware. Renting your house better make sense when comparing your rental income to your mortgage, or it's not worth it.
Art. #3 (my favorite) How Much Real Estate Should You Own
http://www.forbes.com/forbes/2009/0803/real-estate-reit-housing-dividend-property-poor.html
This article hits the nail on the head when it comes to the 'my house is a real estate investment' argument. It's not. End of Argument. The author also makes a case for allocating 20% or more of an investment portfolio to commercial real estate. I agree. In studies I will address here later, you will see that adding real estate (especially private, low-leveraged real estate) reduces volatility and increases returns over nearly every time period since the industry began tracking those yields.
Here is the trick to interpreting the authors suggestion that you increase your exposure to real estate: you HAVE to do it right. If the vehicle (REIT) you are investing in has legacy assets (those it purchased between 2001 and 2007) you need to verify that those are priced to market, or reasonably close to it. In addition, not every REIT or syndicator will have the capital to take advantage of the current buying market, nor do all of them have the expertise. Yes, fortunes will be made by buying today, but only by those with the capital AND the experience to play the market right. A very wise person told me early in my career: 'Real Estate is a street game, either you can play it or you can't; you're either in, or your out'. I have spent the entirety of my career since then staying close to people that are 'in'.
Todd
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