Is It Time to Be a Real Estate Maven?

People look at the carnage in the stock market this year, and many of them think to themselves, "Forget stocks! I'm going to invest in real estate." They do this for several reasons, which I'd like to rebut:

  • Because they think real estate is safer. It's not. Your home can lose a huge chunk of its value, too, just like a stock.
  • Because they think real estate offers some real bargains these days. Well, yes. Property prices have dropped significantly in many markets. But remember -- so have many stock prices. So, while some buildings are much more of a bargain than they were, so are many stocks.
  • Because they think they'll earn more with real estate than with stocks. Think again. Even if your selling price is considerably higher than your purchase price, your gain is likely to be much smaller than you expected. Properties carry lots of costs: mortgage interest, taxes, insurance, repairs, upkeep, renovations, utilities, and so on.

Perspective
Yes, in the recent past, we've seen real estate prices grow robustly. But that's not the norm. Over longer periods of time, residential real estate hasn't provided anything close to the returns we saw in hot markets earlier this decade. In fact, renowned economist Robert Shiller suggests that real estate, historically, has just barely kept up with inflation.

Of course, the old reminder to consider "location, location, location" is apt. Each market is different. If you understand that the housing market is cyclical and regional, you can make good money in real estate -- in some places and over some periods. But it's hard to know exactly where and when.

More food for thought
Here are a few more things to think about.

Remember the standard good advice to diversify your assets? You know it'd be risky to park half or more of your portfolio in a single stock. Well, many people have that much or more of their net worth parked in their home, or in some property they bought for "investment" purposes. That's risky, too. Some markets have fallen quite sharply, like California. Others have stagnated or fallen for a long time, like Detroit.

Also, keep in mind that unlike stocks, what you pay up front for a home is just the beginning. You'll pay a lot in mortgage interest, property taxes, homeowner's insurance, and the costs of upkeep and major repairs if you live in your home for a while. In the long run, those costs can dwarf your original purchase price.

What to do
So, should you sell your home now? Not necessarily. After all, paying rent may not end up being all that different from making mortgage payments, especially after taxes. And we all need a roof over our heads, so securing a dwelling isn't such a nutty idea. But think twice before investing directly in real estate.

One alternative to land or buildings is to use real estate investment trusts (REITs). They're securities representing stakes in various real estate portfolios. You can find REITs that specialize in commercial, industrial, medical, or hotel and hospitality properties.

REITs typically pay generous dividends, which makes them attractive to many investors. Here are some REITS, for example, with their current dividend yields:

REIT

Trailing Dividend Yield

Boston Properties (NYSE: BXP  )

5.2%

Equity Residential (NYSE: EQR  )

6.5%

Simon Property Group (NYSE: SPG  )

7.5%

Vornado Realty (NYSE: VNO  )

7%

Another advantage of REITs is that you can get in and out of them quickly -- unlike, say ... real estate.

You could also invest in a real-estate-focused mutual fund, such as the following:

  • Vanguard REIT Index (VGSIX), with a current dividend yield of 7.2% and top holdings including Public Storage (NYSE: PSA  ) and Duke Realty (NYSE: DRE  ) .
  • CGM Realty (CGMRX), with a five-year average annual return of 5.6% and holdings that include Kimco Realty (NYSE: KIM  ) .

So, next time you find yourself drooling at a pile of bricks and sticks, think things through carefully.

For recommendations of some other steady dividend payers, test-drive, for free, our Motley Fool Income Investor newsletter, featuring many firms with dividend yields above 6%.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. CGM Realty is a Motley Fool Champion Funds pick. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 26, 2008, at 9:54 AM, investmentcafes wrote:

    To the Writer

    I Appreciate your Evaluation of where to place some portion of Assets.However when adding in your comments about investing in Real Estate vs Reits..You could have/Should have mentioned that those very Same Reits have Expenses also..Those Reits are subject to offsetting their Loans with..? Yup CDO/CDS...Failure to do quantitative analysis on those important Loan Ratios of Assets Held,Defaults of Properties contained in their REIT portfolio's..ETC. vs their abilities to Continue paying those types of Yields would be,in my Humble Realistic opinion," Foolish".

    The Companies in the Reit are Subject to the Added Facts of,,,Expense fee's on the Fund,TAXES on Cap Gains if any..and as I'd mentioned Borrowing Costs.And Should the Obama Idea's of " Higher Taxes" on Cap Gains/Dividends or letting Current TAX Relief policy on them Expire,Circa 2009/2010..then the added burden of Reits to " Outperform" Relative to all the costs,FEES and chance Property continues Devaluing for another year or so..ETC.Allows me to Question the Wisdom of " Investing" on only the Assumption those Dividends are " SAFE".

    Thanks for your time and work on this area but until a CDO/CDS Market is Established and some amount of Certainty of those CDO/CDS Holdings are marked to some Current level..even if down to .10 cents on the dollar as has been the case Recently and the Property Values/Occupancy levels Stabilize and Clarity on Democrats TAX plans are Finalize would I then consider this area,"REITS" for an Investment and not just a Trade,to Capture Dividends ,if any.

    Take care and Happy Trails.

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