Just as investors can make money from falling stock prices by shorting the shares, you can also make money from the housing crash by going countercyclical. The first thought to cross most people’s minds at this point is to invest in distressed properties, as foreclosed properties and short sales flood the market and dampen the normal real estate market.
In all honesty, this form of investing can be hazardous to your health as the competition heats up. Financially savvy investors have formed numerous entities to take advantage of the extreme weakness of the real estate market; however, this can become active investing at its worst.Flipping in a down market can be nerve racking, and renters can be fickle. Total returns may not adequately compensate for the added time and effort required.
So, how do you make money? And without the additional headaches that personal investing can entail?
Real Estate Investment Trust, or REIT. The REIT industry as a whole encompasses a wide range of sectors, including retail, commercial, leisure, health, or shopping, just to name a few.
Recent Statistics Of The REIT Industry
- The FTSE NAREIT All Equity REIT index reported total returns of 8.28% for 2011, as compared to 2.11% for the S & P 500 and 1.80% for the NASDAQ Composite.Total returns were 27.95% in 2010 and 27.99% in 2009, all difficult years. The dividend yield as of December 30, 2011 was 3.82%, to the S & P’s 2.22% and 1.87% for 10 year U.S. Treasury notes.
- In fiscal 2011, Self Storage REITs produced a total return of 35.22%, with Multifamily Apartment following at 15.10%, Health care at 13.63%, and Retail rounding out the top 4 at 12.20%.
- SNL Financial reported that 41 REITs increased their dividends in 2011, 8 in the health care sector and 7 in multifamily. SNL further expects the REIT industry to increase dividends going forward into 2012.
Mouth watering numbers indeed, even in good times, let alone bad times.
In order to get good ROI from the housing crash, however, only three sectors are favored:
1) Mortgage REIT:
These REITs invest in residential mortgage securities and assets that are mortgage related in a leveraged manner. Investors at this point may cringe at the fact that it was these same securities that largely contributed to the housing crash in the first place. Nonetheless, REITs have managed to purchase these securities at deep discounts. Two notable REITs:
- CVS Investments, Inc., with a yield of 16.53%, with dividends paid on a quarterly basis, and a P/E of 4.3. The market value is only $1.1 Billion compared with an enterprise value of $1.86 Billion
- PennyMac Mortgage Investment Trust offers a dividend yield of 12% and a P/E of 7.94. The $465 Million market cap contrasts with a $521 Million enterprise value.
2) Multifamily REIT:
Rental demand has expanded at a rapid rate, partly due to foreclosures, and supply is tight, with only 38,000 units coming into the market in 2011 to meet increased demand. REITs to watch:
- UDR, Inc. has a 3.5% yield and is only 40% leveraged, with $800 Million at its disposal.
- BRE Properties, Inc. yields 4.1% and has a 96% occupancy rate.
- Associated Estates Realty Corp.: yield is 4.4% and the REIT also boasts of a 96% occupancy rate.
3) Storage REIT:
In this segment, Public Storage is probably the hands down winner, with operations present in major markets across 38 states.
These three sectors of the REIT industry present an alluring and passive way of profiting, and will most likely make money from the housing crash for the next several years.