Your Investments: Buy low and sell high: US real estate?

We are generally reminded of that old investing refrain when we make a bad stock pick and end up doing the opposite – sell low.

By AARON KATSMAN
September 22, 2011 00:08
3 minute read.
Aaron Katsman

Aaron Katsman 58. (photo credit: Courtesy)

Buy low and sell high. We are generally reminded of that old investing refrain when we make a bad stock pick and end up doing the opposite – sell low. For many investors, while buying low and selling high sounds great in theory, in practice it’s hard to implement.

How does one know when an asset is priced cheaply? It’s not easy to know when assets are trading at bargain-basement levels. But sometimes, knowing that something has dropped a lot is enough to make it a good investment.

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Take, for example, US real estate. After such a serious fall, can prices keep dropping? The answer to the question is a resounding – maybe! But for an investor, that question may be less relevant. It is virtually impossible to pick the exact low price of any asset. What is possible is to buy a quality asset at a huge discount; i.e., buying low.

US real-estate markets have been crushed. With prices in some markets 30 percent to 50% lower than they were a few years ago, real estate seems to be cheap. I’m certainly not saying that we are out of the woods and prices could continue to trend lower. It’s just that with the Federal Reserve basically committing to low interest rates for another two years, and mortgage rates at recordlow levels, bargains abound, and for an investor who has a long-term outlook, there could be huge upside potential.

It’s also important to note that US real estate is very much localized, and while some locales are in a mess, other cities are starting to see prices move higher. As an interesting aside, the iShares Cohen & Steers Realty Majors Index (ICF) is up nearly 3% this year; for comparison, the broader S&P 500 Index (SPY) is down more than 4%.

For those of you looking to start getting involved in real estate, here are four ways to go about doing it.

Investment property



Go out and buy an apartment. As an individual property owner you are in control. You decide when to buy or sell, how much rent to charge, etc.

There are a few negatives to an individual buying an investment property. A common problem is raising the large amount of money needed to get started.

Even then, the high initial minimum investment means that most beginners are only able to purchase one property, and this lack of diversification enhances the risk involved with the investment.

There is also the headache of being a landlord and having to deal with leaky faucets and burst pipes.

Real Estate Investment Trust

Another option is to invest in a Real Estate Investment Trust (REIT). A REIT is a trust company that raises a sum of money, to buy, develop, manage and sell assets in real estate. By purchasing one unit of a REIT, you are purchasing a part of a managed real-estate trust, providing much greater diversification.

REITs are similar to investing in regular stocks, so there is no prohibitive minimum investment and they are publicly traded on major stock exchanges, providing relatively quick liquidity. In addition, REITs are normally required to distribute 90% of the income that was generated from their real-estate holdings. This way, you receive your rental income without having to fix the plumbing!

Deals

There are many people out there peddling realestate deals. For a reasonable investment you can become a limited partner in a group that is going to buy a building, a strip mall or some other property whose price is well beyond the average person’s means.

Keep in mind that you need to do a lot of due diligence on the people behind these deals to make sure they are honest. The media is full of stories of fraudulent real-estate deals.

Related stocks

Ask your financial professional for stocks that are related to the real-estate market. They may include publicly traded roofing, landscaping and lumber companies, to name a few. These companies have the potential for price appreciation if the US construction market stabilizes or starts to grow in the.

Whether looking to enhance your income, or for a capital gain, at these depressed levels, real estate is worth taking a look at.

aaron@lighthousecapital.co.il

Aaron Katsman, a licensed financial adviser in Israel and the United States, helps people with US investment accounts.


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