How To Take Advantage Of The Housing Market BEFORE Prices Turn Around

After yesterday's post explaining our position and outlook for the housing/real-estate market, you need a way to benefit from that outlook. We would like to explain to you one great way you can take advantage of a long-term housing market turnaround.

So what are we talking about? What investment is there you can make in housing that can and usually rises in value BEFORE overall housing prices even make a comeback?

This investment we are speaking of is a REIT, Real Estate Investment Trust. REIT's typically comeback and rise in value usually several month's to a few years before housing prices actually turn-around. This is a multi-decade trend that has been occurring since the start of tracking house prices and the first REIT, nearly 100 years.

So what are REIT's, and why should you ultimately invest in REIT's adding them as part of your total portfolio?

REIT's are simply shares of companies which own, invest in, and maintain very diverse holding's of real-estate. REIT's are required by law to distribute a minimum of 90% of their profits to shareholders, due to a special tax designation they are given which reduces their corporate tax rate. Here are REIT requirements:

• Be structured as corporation, trust, or association


• Be managed by a board of directors or trustees


• Have transferable shares or transferable certificates of interest


• Otherwise be taxable as a domestic corporation


• Not be a financial institution or an insurance company


• Be jointly owned by 100 persons or more


• Have 95 percent of its income derived from dividends, interest, and property income


• Pay dividends of at least 90% of the REIT's taxable income


• No more than 50% of the shares can be held by five or fewer individuals during the last half of each taxable year (5/50 rule)


• At least 75% of total investment assets must be in real estate


• Derive at least 75% of gross income from rents or mortgage interest


• No more than 20% of its assets may consist of stocks in taxable REIT subsidiaries.

Now that you have some understanding of what a REIT actually is, we will explain why you should invest in them and what to look for when choosing a REIT.

So why invest in REIT's?

• Leader of the pack, REIT's historically gain BEFORE real-estate/housing stocks, direct housing/real estate prices, and real-estate indexes,


• Historically on average they are the highest performer, above real estate/housing stocks, real estate/housing indexes, and direct investment real estate/housing prices, also they outperform all three market indexes (gained 1% more annually than the best performing index, the S&P500, REIT's gained on average 13.8% a year while the S&P gained 12.7%),


• Provide high dividends on top of their share value growth,


• Relatively LOW correlation to market indexes, real-estate sectors, and individual real-estate stocks, which means when added to a portfolio with a certain weighting REIT's can actually DECREASE volatility(risk) while INCREASING returns,


• Since REIT's are required to distribute such a large portion of their profits as dividends, when the share price drops REIT's on average increase their dividend yield more than individual real estate stocks, providing better down side protection than other real-estate investments,

So now that you have most of the reasons why you should invest in REIT's we will explain how you choose one and what is an ample weighting or exposure to REIT's.

How do you choose a REIT?

1. Learn what specific REIT's invest in and have as holdings, this can be done through their website or a financial website such as Yahoo Finance or MoneyCentral,
2. Management – it's always important when buying into a trust or managed pool of assets to understand and know the track record of the managers and their team. Profitability and asset appreciation are closely associated to the manager's ability to pick the right investments and decide upon the best strategies. When choosing what REIT to invest in, make sure you know the management team and their track record. Check to see how they are compensated. If it's based upon performance, chances are that they are looking out for your best interests as well.
3. Diversification – REITs are trusts focused upon the ownership of property. As real estate markets fluctuate by location and property type, it's crucial that the REIT you decide to buy is properly diversified. If the REIT is heavily invested in commercial real estate and there is a drop in occupancy rates, then you will experience major problems. Diversification also means the trust has sufficient access to capital to fund future growth initiatives and properly leverage itself for the increased returns.
4. Earnings – the final item that you should consider before buying into a specific REIT is its funds from operations and cash available for distribution. These numbers are important as they measure the overall performance of the REIT, which in turn translates to the money being transferred to investors. Be careful that you don't use the regular income numbers generated by the REIT as they will include any property depreciation and thus alter the numbers. These numbers are only useful if you have already looked carefully at the other two signs, since it's possible that the REIT may be experiencing anomalous returns due to real estate market conditions or management's luck in picking investments.

So remember you should look at:

• Holdings
• Management
• Diversification
• Earnings
• Net Asset Value (NAV)
• Adjusted fund from operations
• Cash available for distribution

It may seem like a lot, but choosing a REIT should not be a daunting and hard task. All of the above information is readily available on the REIT's website, or on almost any other financial website. A moderate portfolio should have close to 10% of it's holding's in REIT's and another several percent in other real-estate investments. This 10% weighting will decrease for more conservative portfolio's since exposure above 10-15% REIT's will on average begin to increase volatility of a portfolio instead of decrease the volatility.

If you are interested in making a REIT investment the REIT way then you should call us at 262-939-8885 and we can help you choose a REIT to fit your portfolio objectives.