Just this past Thursday, December 31, 2009, I was driving to Denver preparing for my last meeting of 2009. It ended up being one of the most positive meetings I’ve had all year. And finishing it on one day in a year that was by all means “challenging” was a good way to close out 2009. On my way down, I listened to Bloomberg on Sirius and Kathleen Hayes interviewed Chris Mayer, a professor at Columbia University of real estate. It was a fascinating interview and it reinforced for me why buying an individual property is more advantageous than buying a REIT. Here are the following reasons why:
1. Obtaining a loan against an individual property gives you the opportunity to take advantage of other people’s money to improve the return on your estate. With a REIT, you can’t do that. In this current credit environment, any good lender applying risk sensitive measures may find themselves in a very favorable environment as the market begins to recover. For example, as prices drop 40% on real estate and current LTVs (loan-to-value) are 60% to 70%, as those prices rise again, the LTV and risk of the loan decreases considerably. . Smart lenders who understand this concept will certainly take advantage of this and make good loans.
2. I like to touch and feel the market I am investing in to make the best real estate investment decisions possible. When it comes to a REIT, I can’t figure out exactly where they’re investing or exactly what they’re investing in and that would make me uncomfortable buying a REIT.
3. A REIT does not offer the opportunity to go through tax deduction or cost recovery on the asset, thereby improving your cash flow situation. When shopping in a single building, this is certainly possible. Buying into a REIT is not.
4. Speculation. We have all had enough speculation in recent years that the markets have created a bubble-like environment. Although this is a great opportunity to buy, we should buy on fundamentals, not on speculation. According to Mayer of Columbia University, REITs are overvalued by 20% so far this year. The public has overvalued REIT stocks by 20% at the end of the year. This tells me that the public is not appreciating the fact that we are in a recovery, so speculation is causing REITs to be overvalued.
The long-term benefits of buying a single property are certainly more compelling to me than buying a stock that is subject to the vagaries of public emotion. Buying a single property gives you many more benefits in the long run, as long as you buy it right, buy it in a market you know, and have an exit strategy that makes sense.
This blog has been categorized in Capital Markets:
As an investment vehicle, real estate successfully competes with other investments, such as stocks, bonds, and certificates of deposit, for a place in an investor’s portfolio. However, the performance of any given alternative is determined, in part, by its level of risk. When reviewing and comparing options, individuals and corporations must weigh all the ingredients that add to this risk. Therefore, the capital cost and quantity required will be critical to this process. Setting a required rate of return and discounting the projected income stream with an appropriate discount rate helps the investor make a final decision.
