By Ronald D. Birnbaum,CLU,ChFC,CASL™
From 1972-2004, statistics from Ibbotson Associates show that adding real estate to an investment portfolio decreased risk and increased return.According to www.investinreits.com, the NAREIT index has outperformed the S&P 500, Dow Jones, and NASDAQ indexes from 1975-2005.
REITs have traditionally been the best way for most individual investors to buy institutional quality real estate. For just a few dollars you can purchase a share of a publicly traded REIT - receive a solid dividend and enjoy the potential for capital gains. All this and the liquidity of a publicly traded stock - no wonder REITs have been very popular over the last decade.
With the appreciation of publicly traded REITs from 2000-2006, however, dividends have fallen from above 8% for the average REIT in 2000to 4% today.Still, for the average investor, public REITs may serve well within an investment portfolio.For the accredited investor, however, there are better choices than publicly traded REITs.
Best Investment Values in Real Estate
The best investment values in real estate today are in the institutional market.Real estate with a market value over $10,000,000 qualifies as institutional grade, and the bigger the better.This is the type of real estate sought by pension plans, state and federal governments, REITs, limited partnerships, etc. Foreign governments have invested over $100 billion dollars in institutional grade real estate in our country over the past couple of years.They consider US real estate attractive because of the stability of the US economy, just as foreign investors are attracted toUS govt. bonds.
Economies of scale make this class of real estate the best value.To see why, imagine a 4-unit rental building in your neighborhood.You may pay $100,000 per unit.But put an institutional grade building - say a 100-unit rental building in that exact same location with the exact same units as the 4-unit building, and you should be able to pay perhaps $50,000 per unit.Also, operating costs are less for the larger buildings, per sq. foot of space. The institutional market is much more efficient and thus a better investment than lower-priced real estate.
Investing in Income Producing Real Estate
There are several places where you may turn for solid investments in institutional grade real estate.Private REITs and non-traded public REITs are usually purchased at $10 per share and are not market-inflated like their publicly traded REIT cousins.Because of their illiquid nature, state & federal regulators have minimum income guidelines for potential investors.But they can be an excellent way to get institutional-grade real estate into your portfolio.
Because REITs must hold their real estate purchases for at least 4 years, investors must be able to withstand the 4-10 year holding period.Such REITS can offer dividends starting at 7% and also have appreciation potential.Some of the smaller non-traded REITS have significant potential for appreciation while paying a 7% dividend.While dividends are not guaranteed, dividends should rise as tenants pay more rental income.Due to federal regulations, a REIT must pay out at least 90% of their net operating income to shareholders as a dividend. If you are looking for solid income with appreciation potential, consider the non-traded REIT market.
Investing in Limited Partnerships
Limited Partnerships are more aggressive than REITs.Unlike REITs, LPs may invest worldwide, and have no minimum holding period requirements for the buildings they acquire. LPs may flip properties as soon as desired, usually after significantly upgrading the property.Unlike the LPs of the 1980s, today’s LPs cannot operate indefinitely, usually have holding periods of 3-5 years before they liquidate their portfolio. If you are seeking aggressive capital appreciation without a concern for dividends, take a look at LPs. These are private placements, and are reserved for accredited investors.
