Friday, May 27, 2011

 

Turning an investment idea into an investment

There are three major asset classes in which people hold their money: stocks, bonds, and real estate. At any given time it makes sense to reevaluate your portfolio and move money from one to the other. (Most people's real estate exposer is their home so moving money out of the home would involve getting a home equity line and buying stocks or bonds. This exposes you to interest rate risk and might not make sense unless you expect rates to remain the same or fall within your investment horizon; say min. 5 years.) Stocks have had two very good years, real estate has had 5 very bad years. (Buy low, sell high.)

I think now is a good time to think about investment real estate. Low interest rates and a flat real estate market are great conditions for finding bargains. Properties are renting for more than the cost of mortgage, insurance, and taxes in some areas. Of course, it might be even better next year or the year after, but I do know one thing. In ten to twenty years prices will be back to 2005 levels which represents a 100% return on your money in most places. Do you think real estate prices in 2031 will be higher or lower than 2005 levels?

Now say you put $20k down on a property. Rent covers all the costs of ownership. What kind of return will you see in 20 years if prices go to 2005 levels? 12.2% Just put $200 in Current principal, zero additional, 20 years to grow, and 12.2 as the interest rate and you get approximately $2000. $2000 is the doubling of the current price of $1000 of which you put 20% down, hence, the $200 as current principal. The weakness of this analysis is that rent and taxes are variable. Also, property needs maintenance and that should be factored in. I think a real estate professional should be able to tell you approximately what you would spend maintaining a property. That said, you are counting on inflation returning and increasing rents and the price of the property.

So how do you take advantage of this without becoming a landlord? I thought I would take a look at apartment REITs. As you can see from the link this index of apartment REITs tracks the stock market pretty closely. Damn. That is not what I wanted to see. So how to invest in real estate without becoming a landlord? I have no idea. But I have a feeling if it were easy someone would have already thought of it.

Anybody have any ideas?

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