Real Estate Investing: Much More than Just REITs
With home prices plunging back to levels last seen in 2002 and a mass of evidence that the housing market is still seriously messed up, the thought of investing in real estate may sound crazy. And if you own a home, you probably have a significant chunk of your wealth tied up in real estate already. So is there any reason to own real estate in your investment portfolio? The idea, remember, is to buy low, and a careful, highly diversified approach to the real estate "sector" could very well prove to be a wise move.
I put "sector" in quotes because when it comes to investing in real estate, most retail investors think real estate funds, homebuilder stocks or REITs (real estate investment trusts). They all have done well since the market bottom of 2009, but you can chalk part of that up to the old traders' saw, "the harder the fall, the higher the bounce." REITs in particular have benefited from being decent dividend-payers at a time when interest rates are near zero. Indeed, over the past decade, while your stock portfolio barely kept up with inflation (and you know what happened to your home equity), REITs soared nearly 300 percent.
However, with the recovery in real estate and the broader economy so nascent and fragile, retail investors would be wise to take a more cautious approach -- and widen their views as to what constitutes investing in real estate.
"Most real estate mutual funds are REIT funds," says Jeff Kolitch, portfolio manager of the Baron Real Estate Fund (BREFX). "The Baron Real Estate Fund takes a much broader and more balanced approach to investing in real estate." Your typical real estate ETF drills down on REITs or homebuilders and most real estate mutual funds limit themselves to REITs, real estate operating companies and health care facilities.
Kolitch has broadened the definition of real estate investments to include such companies as Stanley Black & Decker (SWK), Owens Corning (OC), and Trex (TREX), a lumber company. Another unusual choice: American Tower (AMT), which is actually in the tech sector and makes stuff for wireless communications. Kolitch also puts money to work in more traditional real estate investments like everyone else. Capital Senior Living (CSU), a long-term care place for the elderly, is a top holding, for example. And, despite the miserable state of the homebuilding businesses, he also invests in Toll Brothers (TOL) and D.R. Horton (DHI).
As for REITs, Kolitch greatly reduced his fund's exposure during the first quarter to about 16 percent from nearly 35 percent at the end of December. REITs have had a great run, but now they are yielding only around 4 percent, which is at the low end of their historic range, suggesting returns may be limited in the months or years ahead.
Owning real estate as an investment may make sense. Just make sure you are truly diversified.
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