Real estate can be a great investment and has the potential for excellent income and long-term growth. However, buying investment properties is not for everyone.
We asked three of our analysts for their favorite way to invest in real estate, and here is what they had to say.
Matt Frankel: My favorite way to invest in real estate is with a REIT that owns commercial properties, such as National Retail Properties (NNN 0.09%).
One reason for this is that commercial real estate produces much more predictable income than residential properties. Not only are the lease terms longer, but tenants sign what is called a triple-net lease (that's where National Retail Properties' ticker symbol comes from). Under the terms of a triple-net lease, tenants are responsible for property taxes, insurance, and building maintenance. All the landlord has to do is find tenants and collect a check.
National Retail Properties leases its commercial properties to high-quality national tenants like CVS, 7-Eleven, and SunTrust Banks. The portfolio boasts an outstanding 98.8% occupancy rate, and the average tenant has 12 years remaining on their lease.
Over the past 15 years, the trust has produced an average total return of 16.1% per year, more than tripling the 4.9% returns of the S&P 500. So, National Retail Properties can do wonders for your portfolio over the long run, without the risks associated with investing in residential real estate or individual properties.
Dan Dzombak: My favorite way to invest in real estate is with the largest real estate brokerage franchisor in the country, Realogy (HOUS -3.79%).
Realogy owns some of the most well-known brands in the real estate brokerage business including Century 21, Coldwell Banker, ERA, Corcoran, Sotheby's International Realty, and Better Home and Gardens Real Estate.
Realogy's franchisees run 13,400 brokerage offices around the world which contribute 55% to the company's EBITDA of $796 million in 2013. The company also owns its own brokerage offices (26% of EBITDA), a global relocation company (13% of EBITDA), and a title and settlement services group (6% of EBITDA). When the real estate market does well, Realogy does well, so the business is in a prime position to profit from the real estate market's continued recovery in the U.S.
The real estate market not doing well is a risk, given that Realogy's debt level is so high. The company was taken private in 2007 in a leveraged buyout by Apollo. After struggling through the financial crisis, Realogy was IPO'd to reduce its debt level, which still remains high at over five times EBITDA. While that's high, management is focused on using its free cash flow to deleverage the business, which should provide a tailwind going forward as high cost debt is refinanced or paid off.
Trading at roughly 16 times free cash flow, the stock is not especially cheap at the current level of housing market activity but will do well if the real estate market continues to recover.
Selena Maranjian: I agree that REITs are a terrific way to invest in real estate, giving you diversification as well as liquidity -- you can't, after all, decide to sell some of an actual real estate property and do so within a day. A REIT I like is HCP(PEAK -1.15%). It's great for investors who want exposure to real estate in their portfolios, and its focus on the health-care realm offers extra security; as our nation's population grows and ages, people will need more and more medical services -- from doctor's offices, hospitals, senior living communities, and other health-care facilities.
The company notes that, "We are the first health care REIT selected to the S&P 500 and the only REIT included in the prestigious S&P 500 Dividend Aristocrats Index following 29 consecutive years of dividend increases." (Its dividend recently offered a 4.8% yield.) HCP's portfolio features nearly 1,200 properties across more than 40 states, and they offer dependable cash flow. Worriers can certainly pick out some risk factors: HCR Manor Care generates about a third of HCP's revenue, its properties are concentrated rather heavily in California, Texas, and Florida, and, like other REITs, the company is vulnerable to interest rate increases. But it remains an attractively priced company in a promising field, enjoying reliable income from relatively long leases and investing in more properties. Its track record reflects well on management; HCP's stock has averaged annual gains of more than 15% since its IPO in 1985. That's darn impressive.