Lessons from the Pros

Real Estate

Hands Off Real Estate Investing

Does hands off real estate investing sound too good to be true? Well, it really isn’t. This kind of real estate investing would be called a REIT, Real Estate Investment Trust:  A security that sells like a stock on the major exchanges and invests in real estate either through properties (also known as an equity REIT) or mortgages.  REIT’s receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. As defined by Investopedia

REITs are a kind of trust that was authorized by Congress in 1960. Congress understood that much of the U.S. Economy is driven by the real estate industry.

U.S. Wquity REIT Market Chart

An Equity REIT invests and owns properties.  These properties are typically office buildings, shopping centers, large (100+ doors) apartment buildings. Single family homes aren’t usually in this category, but that’s changing.

When the real estate market collapsed, there was an over abundance of distressed homes. Some large-scale investment firms have had an opportunity to buy these distressed properties in bulk. Typically this has been done through private funds. These funds start with high buy ins ($50,000+). These funds would then rehab and sell the properties, much like an individual flipper does. The REIT market has taken this model and adapted it to the Equity REIT model. REIT’s are now being made available that offer a way for investors to get into institutional scale investments of single-family homes that are being converted to rental properties.  This is a new emerging REIT, the Single-Family REIT.

At the Real Estate Luminaries Series held at Gerorgetown University, chairman of the Startwood Waypoint Residential Trust (single-family home REIT) Barry Sternlicht talked about his confidence in this emerging new REIT segment. “We think it’s a real business, but the jury’s out,” said Sternlicht, adding that he expects the housing market to see four to five years of “good growth” going forward.  Sternlicht is also keeping an eye on whether Blackstone Group LP (a privately held REIT) decides to launch its Invitation Homes business into the public market. He expressed the view that Blackstone would likely want to assess Starwood Waypoint’s success in the public market before making a decision.  “We’re their little guinea pig,” he said.

Many in the REIT world aren’t sure this is a sustainable model.  I personally like it because I see many ways the assets can be of value to the REIT.  As rentals, they are at the high end of the rental market. Renters who choose a home to rent tend to be better tenants with more staying power. As balance sheet assets, there is some data that shows they are appreciating at a good rate.  I also see where the asset could have the flexibility to adapt to the market if there are more buyers than renters. Perhaps the REIT could sell the homes on contract and continue to produce income for the REIT.

The REIT market as a whole is seeing a “strong” performance both in the past month and this year according to Paul Morgan, managing director of equity research at MLV & Co. He also added that…”We’ve avoided the disappointments that can cause a hiccup in the market.” FTSE NAREIT ALL REITs Index posted a total return of 2.9 percent in April compared to the S&P 500 Index total return of .7 percent. The FTSE NAREIT ALL REITs first Q showed gains of 8.6 percent. So, if you are looking for good returns on real estate without ANY management, REIT’s might be the answer for you.

Great Fortune,

Diana Hill – dhill@tradingacademy.com

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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