Originally Posted: January 6th, 2010
Just last Thursday, Dec 31st, 2009, I was driving down to Denver preparing myself for my last meeting of 2009. It ended up being one of the more positive meetings I have had all year. And to end it on a day in a year that was by all means “challenging” was a good way to close out 2009. On my drive down, I listened to Bloomberg on Sirius and Kathleen Hayes interviewed Chris Mayer, a Columbia University Professor of Real Estate. It was a fascinating interview and reinforced to me why buying an individual property is more advantageous than buying into a REIT. Here are the following reasons why:
1. Getting a loan against an individual property provides you the ability to leverage other people’s money in order to improve your returns on your equity. With a REIT, you are unable to do that. In this current loan environment, any good lender who applies sensible risk measures can find themselves in a very favorable environment as the market starts to rebound. For example, as prices drop 40% on real estate, and current LTV’s (loan-to-value) are 60% to 70%, as those prices go back up, the LTV and the risk on the loan goes down considerably. Smart lenders who understand this concept will certainly take advantage of this and make good loans.
2. I like to touch and feel the market I am investing into to make the best possible real estate investment decisions. As far as a REIT goes, I am unable to understand exactly where they are investing or exactly what they are investing in and that to me would make me feel uncomfortable buying into a REIT.
3. A REIT doesn’t offer the opportunity to have a pass through tax deduction or cost recovery on the asset whereby improving your cash flow situation. When buying into a single building, this is certainly possible. Buying into a REIT, it is not.
4. Speculation. We’ve all had enough speculation over the last couple of years whereby the markets have created a bubble like environment. Albeit, this is a great opportunity to be buying, we must be buying on fundamentals not on speculation. According to Mayer from Columbia University, REITs are overvalued by 20% year-to-date. The public has overpriced REIT stocks by 20% as of yearend. This tells me the that the public is not pricing in the fact that we are in a recovery, whereby speculation is causing REITs to be overvalued.
The long-term benefits of buying into a single property are certainly more convincing to me than buying into a stock that is subject to the whims of public emotions. Buying into a single property gives you a lot more benefits over the long haul, provided you’re buying it right, buying it in a market that you know, and having an exit strategy that makes sense.
Darren Nakos, CCIM
Resort Realty Capital
111 Main St
P.O. Box 630
Frisco, CO 80443-0630