If you ask most people, they probably have you will say that their real estate investments over the past two years have not performed well. Some have questioned or not real estate will never be the cow that was once. But if you look at the actual performance of the real estate over the past two years, a different image appears. In 2009 and 2010, the FTSE NAREIT Index, which measures the performance of all the estate investment trusts listed in NYSE, NASDAQ and American Stock Exchange, returned more than 25%. It is too lousy step and probably a little surprising to the average investor.
How is it possible that the real estate index performed so well?
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First, understand that you compare two completely different investments: your House, which is a residential property and the index, which measures a group of listed companies, called real estate investment trusts (REITs), all with several properties in various sectors of the market. The big difference is that public REITs generally invest in commercial properties, such as shopping centres or office buildings, not one or two houses in your neighborhood.
Public REITs medium gives investors the opportunity to participate in the "big guys", while leaving them liquidity to get their money when they need it. However, while FPI have long existed, the opportunity to earn money with them depends on several factors. Here are some things to consider before you invest:
Everything is in the timing. Historically, REITs have only four bear markets since 1973: 1973 and 1974; 1987 to 1990. 1998-1999 and 2007-2008. These relatively short periods of negative performance followed by a run of 12 years of positive returns with an average yield of 23% and two runways of 7 years with positive returns of 20% and 22% respectively.
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Understand the context economic. The economic backdrop includes the amount of available capital, the State of the economy and the amount of new construction on the market. Currently, access to capital is back and investors have injected millions of people in new and offers add-on in public and public non-traded REITs. This influx of fresh capital has enabled these REITs to buy several properties at prices reduced to vendors in distress, as banks, insurance companies and pension plans. Combine these buildings low prices with the increase in rents and minimal construction and you have a fairly good outlook for REITs.
Choose your sector wisely. Invest in the IHT, there are several areas to choose from, such as care health, Centre commercial, buildings of offices, apartments and hotels. These areas tend to perform differently depending on the where we are in the economic cycle. The length of a typical lease for the sector also plays in how volatile or sensitive sector is the economic cycle. Hotels and apartments have a typical lease from one day to one year agreement. Thus the flow of cash to the owner is affected almost immediately when there is a change of occupancy rate. The health care, shopping centres and malls tend to require 10-20 year leases. This provides a cash flow more stable for the owners.
More the lease less volatile that the price of the shares may be - the first movers in the sector are generally those with shorter leases.
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Monitor the net asset value (NAV). Public REITs tended to trade at a discount to their NAV in times of economic recession and premiums for an economic recovery. The current premium to NAV at the end of the first quarter was approximately 13 per cent, according to Green Street Advisors. A possible reason for the bonus is that investors anticipate further appreciation of the underlying real estate.
Understand assessments of the REIT traded to the public and non-traded public REITs may allow investors to decide what type is more appropriate for them. Liquidity and dividend yields are also large differences between the listed and public non-traded REITs. Non-commercial of the REIT dividend yields tend to be higher than that of the publicly traded REIT, but investors should consider the lack of liquidity of non-traded REITs. An investment in a non-traded REITs generally requires a commitment of several years.
But the trend is your friend: investors should reconsider real estate upside potential, but not at the same rate almost all of the past two years. The economic backdrop is improving, funding becomes more available, prices have been moving more, rents are rising and assessments are still at historic levels. There are a few headwinds on the horizon, but both that we see the economy continue to strengthen, there is money in the real estate in 2011.
Timothy s. MicKey, CFP ?, is a Managing Director and co-founder of Monument Wealth Management in Alexandria, Virginia, an investment offering all services and wealth management firm. Monument Wealth Management is supported by financial, a registered and independent brokers advise in investments, Member FINRA/ISDR LPL. Monument Wealth Management has been presented in several sources of national media in recent years. Follow Tim and management of heritage of the Monument on their blog Off The Wall, on Twitter at @ MonumentWealth and @ TimothySMickey and on their Facebook page. The opinions expressed in this material are for general information only and is not intended to provide specific advice or recommendation for the individual. To determine what investment is appropriate, please consult your financial advisor before investing. All references of performance are historical and are not a guarantee of future results. Strategies for diversification and asset allocation does not ensure a profit or protect against loss.
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