Investment Consult

June 17, 2005

Thinking about real estate?

So, you ask, "Why shouldn't I get in on it, too?"

Good question, but from where I stand, this isn't the right time to invest in residential real estate. Prices have already soared way beyond what people think most houses should be worth. Because of the large gains that have occurred on both coasts and in many other markets, there's less upside potential. Moreover, rising interest rates could hurt prices because higher rates mean people won't be able to spend as much for a house.

While there are similarities, housing is less likely to instantly implode the way tech did. Unlike with tech stocks, most people won't panic and sell their houses if prices start to fall. So housing prices wouldn't necessarily decline immediately. And I'm not saying that real estate will definitely take a dive. Its growth rate might just slow or plateau.

Sure, there will always still be reasons to buy a house. There are quality of life considerations and tax benefits from owning a home. But if you're investing in a residence at these high prices because you expect growth to continue, that's risky.

If you want to make money in real estate, you're better off with a real estate investment trust, which has different tax and inflation-hedging advantages than buying a single property on your own. Many publicly traded REITs invest primarily in commercial properties: office buildings, shopping malls, etc. Others invest primarily in mortgages or are a hybrid. Mutual funds that specialize in real estate were up 37 percent in 2003 and 32 percent in 2004; the S&P 500 earned 29 percent and 11 percent, respectively.

One REIT that I like is Equity Office Properties Trust, headquartered in Chicago. It's the nation's largest publicly-held office building owner and manager. Its earnings are still down from 2003, but as the economy rebounds and the market for office buildings strengthens, the company's earnings should bounce back because it's buying properties in areas where values are most likely to continue to remain strong. I'd also look at Washington Real Estate Investment Trust, which buys only properties in the Washington, DC, area. It has some promising projects scheduled that should enhance earnings.

For even more diversification, invest in a real estate mutual fund. Two that I recommend to clients are Cohen & Steers Realty Shares, which has averaged 20.2 percent a year over the five years ending May 25, and Fidelity Real Estate Investment Portfolio, which also has averaged 20.2 percent for the same time frame. Both are excellent funds with proven managers at the helm.

The author, a fee-only financial planner, is president of L.J. Altfest & Co. ( http://www.altfest.com) a financial and investment advisory firm in New York City, and an associate professor of finance at Pace University. The ideas expressed in this column are his alone, and do not represent the views of Medical Economics. This column appears every other issue. If you have a comment, or a topic you'd like to see covered here, please submit it to Investment Consult, Medical Economics, 5 Paragon Drive, Montvale, NJ 07645-1742. You may also fax to 973-847-5390 or e-mail to meinvestment@advanstar.com
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