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Thread: Keep an eye on apartment REIT's

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    Banned Melonie's Avatar
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    Default Keep an eye on apartment REIT's

    For those interested in a "speculative" investment, REIT's offer the opportunity to share in the profits of real estate without having the hassle of owning or managing property yourself. As you probably know, with historically low mortgage interest rates, apartment vacancies in most cities have been at historically high levels because many people could qualify for mortgages to purchase their own homes. However, now that it appears that mortgage interest rates have turned north for the forseeable future, fewer and fewer people will be able to qualify for mortgages. This in turn should increase the demand for apartments, thus increase rents, thus increase profits for companies owning and managing rental properties.

    You might want to check out

    Many apartment oriented REIT's are starting to pay 5-6% dividends on top of a potential further increase in their share price.

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    God/dess NinaDaisy's Avatar
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    Default Re:Keep an eye on apartment REIT's

    Thanks Mel! This might just be what I'm looking for to diversify my portfolio!
    "She has written so well, and marvellously well, that I was completely ashamed of myself as a writer...But this girl, who is to my knowledge very unpleasant and we might even say a high-grade bitch, can write rings around all of us who consider ourselves as writers"

    Ernest Hemingway on writer, aviation pioneer and horse trainer Beryl Markham


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    God/dess montythegeek's Avatar
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    Default Re:Keep an eye on apartment REIT's

    This is not an attempt to say a REIT investment is bad or good or neutral or appropriate for anyone, but to explain some of the things you need to know about commercial realestate.

    #1 All Real Estate is local. The profits you are paid dividends out of (and REITS are mandated to pay 90+% of current profits immediately to keep that tax status) depend entirely on THE individual REITs portfolio. A REIT in a good place will perform dramatically different from a REIT in a bad place so you need to know about those places.

    One place to know something about local conditions is http://www.census.gov/hhes/www/hvs.html
    Currently, nationwide, rental vacancies are 10.2% plus or minus 0.2%. It is up from 9.6% a year ago. The 2003 annual statistics gives data at a finer level and a choice of a Southern California or Florida REIT depends on those local conditions, not national conditions.

    #2 The 5% REIT dividend payment is not directly comparable to a 2% on say a consumer goods company because they are NOT taxed at 15% because they are already taxed-advantaged. The tax rate on a REIT is ordinary income, not 15%!

    #3 Real estate rents do not rise when the vacancy rate falls, they act like most commodity prices and only rise when the rental vacancy rate has recovered enough. On a national basis that means rental vacancy rates have to improve to about 8.0-8.5% before rents rise. Rents lag the vacancy rate and it could be years before they rise enough. Locally that will be dramatically different!! Know what you are buying and local rates.

    #4 Do not compare a City average and a REIT average for vacancy rates. They are different animals. One counts mom renting her attic apartment which is different from a complex, but directly affects the rents Reits can get just like Walmart prices affect mall prices.

    #5 Interest rates on mortgages are not so high to make people move back to an apartment. Once people move to a private residence they do not go back for 35 years except if they move when they might change. If they do go house-to-apartment it is usually short term so no real gain there.

    #6 None of the above is relevant for a short term investment or short-term stock price movements except in determining the yield on the stock. The exception is the tax issue. If the market believes Melonie's premise as a theme for 2005, the prices will be bid up---this is an interpretation on expectations which can disconnect from reality for 6-12 months as in a bubble. If that is the case, it could be true for 2005 and revert in 2006.

    I deal in fundamentals, not psychology. On the fundamentals, 2006-7 is when the rents will recover, not 2005. If you want to play a market's expectations and believe the premise, do not use this as a buy and hold, but ride the theme up, sell, and buy it again when the reality sets in. That is stock picking and is how people make money.


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    God/dess Lena's Avatar
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    Default Re:Keep an eye on apartment REIT's


    Hmmm.... so, Monty, you're saying that you think they'll go up over maybe the next few months and then level off until 2006?

    And Melonie are you still anti- real estate in general?

    My brain is not made for this kinda stuff...

    Lena



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    Banned Melonie's Avatar
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    Default Re:Keep an eye on apartment REIT's

    Monty, the "psychological" factors are exactly why REITS could make a very good "speculative" investment. In general, the pricing of apartment based REIT shares has taken a beating over the last couple of years precisely for the reasons you pointed out - tax treatment of REIT dividends, high apartment vacancy rates, cheap and easy mortgage lending for first time home buyers etc. IMHO market value hunters are going to suddenly rediscover apartment REITS and bid them up PRIOR to the actual rebound in rents (the stock market is a 'leading' indicator after all).

    I agree with Monty that you need to investigate every REIT in regard to what and where they operate. Many are indeed regional apartment operators. Others have operations in many different cities and regions. Still others include commercial property, mortgage debt etc.

    I have never been against real estate you intend to live in. I am leery of direct purchase of real estate for investment purposes (i.e. that you don't intend to live in), because one piece of real estate is unavoidably tied to one local market.

    IMHO we have yet to see the worst of local property tax increases, industry downsizing/outsourcing etc. These factors can have a profound effect on particular local real estate market resale values, which can be very painful for a direct real estate investor who chose what turns out to be the 'wrong' market.

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    God/dess montythegeek's Avatar
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    Default Re:Keep an eye on apartment REIT's

    Lena and Mel,

    First I am not against realestate as an investment, but think you should use it properly. As Melonie points out, owner occupied real estate with a 5+ year time frame for living there is entirely reasonable except in clearly bloated areas where the time frame stretches out further.

    Second I am by no means against a REIT investment. Just use it with the knowledge that there may well be a decent up followed by a mid-sized-to-worse down followed by a "real" recovery. A long term investor may do better to invest elsewhere until the "real" phase. A short-term trader who keeps on top of it may do real well buying, selling, then buying back. This is the type of trading Melonie likes to do, and she does it very well.

    I am by no means disagreeing with Melonie. The requirement to trade that way is that you really stay on top of it. The messy thing is that in the first phase of an up-down-up scenario some of the best returns would be in the middle-worst places if the market has a bad concept of when the real recovery is. The second up will be lead by the truly well positioned demographically.

    Pick the REIT well for the theme you are going for and the style of investing you are going to do.

    Melonie is right about the market anticipating, but the market does not anticipate by 3 years, the "real" recovery. This breeds the up-down-up scenarios. There is often a similar thing in chip-making equipment stocks where they rise sharply for 6 mos, then go back in the tank because people figured the real recovery much earlier than it would be. Jumping the gun on a theme with the wrong approach can be a real bad idea unless done right. (And Mel covers her heine well)

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    Default Re:Keep an eye on apartment REIT's

    Jumping the gun on a theme with the wrong approach can be a real bad idea unless done right. (And Mel covers her heine well)
    Actually, if my "anticipated trend investing" strategy does have a weakness, it's taking a calculated risk of being too far ahead of a coming trend versus missing out on the lion's share of the run-up by waiting too long for a market indication that my anticipated trend is correct. Sometimes I win big - sometimes I win small - occasionally I take a beating. The key is of course to use stop loss sell orders to limit the downside risk.

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    Default Re:Keep an eye on apartment REIT's

    REITs do come in other forms of real estate. Find a REIT dealing with commercial property, or check out the Mariott REIT. Do your research and you will find that some private REITS are performing at extremly high levels of returns due to the fact they have stayed away from residential/multi-famly rentals, and focused on commercial property. The publicaly traded REITs are performing well but also have to follow the FTC regulations and are not as flexible and high yielding as a private REIT.
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    Default Re:Keep an eye on apartment REIT's

    Atricle that I had bookmarked about three months ago. Hope you find it helpful.

    http://www.nreionline.com/ar/real_es...d_reits_flush/
    My Blog:

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    Default Re:Keep an eye on apartment REIT's

    I think one thing to remember with REITS is to do your own research. As someone who used to be a t a firm that offered a lot of them, the commissions were insane. Be careful who recomends the REIT to you. Many brokers still get huge commissions compared to other products. Same thing goes for Commodities.

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    Default Re:Keep an eye on apartment REIT's

    Like all investments, there is a risk vs reward equation involved with REITS. In the case of privately offered REITS this is definitely the case, since one actually knows very little about the company or about the properties involved ! At least with exchange traded REITS this information must be posted.

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    Default Re: Keep an eye on apartment REIT's

    wow, my brain is spinning

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