Your Investments: Is it time to invest in real estate?

Even the Talmud is in favor of real estate. The question is whether now is a good time to start to invest in it.

By AARON KATSMAN
December 9, 2010 00:37
3 minute read.
The Jerusalem Post

Money 311. (photo credit: Bloomberg)

 
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Global real-estate markets have been crushed. With prices in some markets 50 percent lower than they were a few years ago, real estate seems to be cheap. Owning property is part of most asset-allocation models, meaning that it serves as a good diversification tool.

Even the Talmud is in favor of real estate. The Talmud (Bava Metzia 42a) advises that one should keep a third of one’s assets in property, another third in business and the other third in cash. For those of you who do not have exposure to real estate, the question is whether now is a good time to start to invest in it.

ISRAEL VS THE WORLD

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Although the local real-estate market has been on a tear, it’s important to note that nothing goes up forever. Moreover, investors should note that the old refrain, “Real estate never goes down in Israel,” isn’t necessarily true. In fact, earlier this decade, the real-estate market in the country was dormant.

Keep in mind that while supply is limited, which is good for price appreciation, both the Bank of Israel and the government are doing all they can to try and cool off the local market.

BUY LOW/SELL HIGH

Ahhh, that old investing refrain. A good way to potentially make money is to buy quality assets when they are out of favor and trading at low levels. That brings us to international 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.



OPTIONS

I’d like to highlight four ways to go about investing in real estate.

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. When buying an investment property, a common problem faced by many individuals is raising the large amount of money needed to get started.

Even then, the high initial investment minimum 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 trusts: Another option is to invest in a real-estate investment trust (REIT), which 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 real-estate deals. For a reasonable investment you 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 construction market would stabilize or start to grow in the United States.

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 is a licensed financial adviser in Israel and the United States who helps people open investment accounts in the US.

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