Two Unique Approaches to Real Estate Investing

Investors attempting to gain exposure to the housing market/real estate will either play the housing market through buying an actual property or turn to the stock market for investment products. Typically the investors will turn to REITs (real estate investment trusts), home builder stocks, or an ETF that invests in the areas. I will offer 2 unique approaches to the real estate sector; one an ETF and the other a REIT.

The ETF is the Claymore/AlphaShares China Real Estate ETF (TAO), which invests in companies that derive the majority of their income from real estate operations in China. Nearly all the 39 stocks that make up the ETF are traded overseas in China or Hong Kong, though the one exception is E-House China Holdings Limited ADR (EJ). TAO began trading in December 2007 and hit a high of $27 before hitting a low of $7 in November 2008. After finding the bottom, the ETF has begun to attract more attention with the average volume quadrupling. The 7.9% GDP increase China reported in the second quarter has only helped the bullish case for the county and its real estate stocks.

Remember what the American Dream was before the housing bubble and recession? In case you forgot, it was to own a home. Think about where China is in its stage of economic development. The middle class is growing and now families are able to afford the down payment for a loan and the demand for housing should only increase in the years to come. TAO is the best one-stop investment vehicle to play the potential boom in China real estate. Investors should look for an entry between $16 and $17.

The second investment option is Capstead Mortgage (CMO), a mortgage investment REIT that pays a quarterly dividend that currently equates to a yield of 18.4% annually. CMO has a portfolio that consists mainly of residential adjustable-rate mortgages (ARM) that are issued and guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. The company’s annual revenue has steadily increased since 2004, but the first quarter of 2009 saw a drop from one year earlier. Earnings per share for 2008 came in at $1.94 versus 19 cents in 2007 and the first quarter of 2009 saw CMO earn 58 cents, its best quarter in years.

There are a number of reasons I own CMO for clients of Penn Financial Group and believe it is an attractive long-term investment. The government backing the mortgages that CMO invests in is a man made backstop for the stock. There is also the abnormally high dividend yield that investors salivate over. Finally there is my thought process that the stock market and real estate markets have seen the worst. Back to the dividend for a moment; the last four quarter payouts were: $0.58, $0.56, $0.36, and $0.55. There is no guarantee the 18% yield remains and a good chance the quarterly payouts will vary over the years. The good news is that the company has paid a dividend since 1985 and I do not anticipate it ceasing to do so at any time in the near future. Ideally, an investor would look for a pullback to the $12.50 area for a new entry into CMO.

Comments

[User 450080:]

Not bad suggestions for a long-term investor. But I would caution anyone who is looking for a high yield return that when commercial real estate crumbles (and it will) the economy may take another nose dive, so there really is no guarantee that the yield will remain at the current levels. The author did point out that the dividends may vary, so I am only trying to emphasize the risk involved.

But, again, over the longer term, both investments make great sense intuitively. I like to define long term a little more stringently today as near a decade. Since there is a real possiblity of further damage to the economy near term there is also the real possibility that any recovery may take much longer than many pundits expect. Take appropriate precautions with your money.

Jul 20 09:25 PM

[Kinabalu:]

CMO invests only in residential mortgage securities guaranteed by government sponsored entities, so there is no commercial real estate exposure or credit risk. The risks are interest rate risk and prepayment risk.


On Jul 20 09:25 PM User 450080 wrote:

> Not bad suggestions for a long-term investor. But I would caution
> anyone who is looking for a high yield return that when commercial
> real estate crumbles (and it will) the economy may take another nose
> dive, so there really is no guarantee that the yield will remain
> at the current levels. The author did point out that the dividends
> may vary, so I am only trying to emphasize the risk involved. <br/>
>
> But, again, over the longer term, both investments make great sense
> intuitively. I like to define long term a little more stringently
> today as near a decade. Since there is a real possiblity of further
> damage to the economy near term there is also the real possibility
> that any recovery may take much longer than many pundits expect.
> Take appropriate precautions with your money.

Jul 21 12:44 PM

[Old Trader:]

TAO sounds interesting, but I've heard/read there seems to be something of a bubble forming in Chinese real estate, and to an extent, the stock market, since it appears a fair bit of the Chinese stimulus plan has ended up in those sectors, so some caution might be in order, before diving in.

Jul 21 03:58 PM

[Matthew D. ...:]

All three comments are informative - thanks.
With CMO you are correct that it concentrates on residential mortgages, but a major blowup in the commercial side would likely hurt the entire RE market. I believe the potential blowup is overdone and CMO should be able to sidestep any issues.
TAO is an aggressive play, but I do not feel the China RE or stock market is at bubble levels. They are both working their way back from major pullbacks.

Jul 21 05:16 PM

[bobbobwhite:]

When the commercial market stumbles, Main Street will not be nearly as affected as it was with the housing market as most commericial real estate is not owned by Main Street. And, the country has gotten used to r.e. problems over the past few years and has been well forewarned about the commercial issue so it won't take them by surprise as did the housing crash.

I don't think it will be the huge crisis some are predicting.

Jul 23 11:04 AM

[real estate...:]

It seems to me that REITS will always be a mainstay and personally I think they will just become sweeter and sweeter. Seems that more and more institutional money is starting to head into real estate. When it is all said and done people like investing in something that is tangible and though overall prices may continue to fall, there are deals out there (bundles of deals) that are hard to beat.

Very well written article, as a full time investor I rarely find material online that is this good.

Jul 25 08:36 AM

[Xela99:]

Real estate= #1 Inflation hedge.
Big box retail and many office markets are saturated all over the country but in economically deprived areas where the population is flooding out of the cities for safe streets and decent schools are a good bet(detroit, buffalo, ect ect).Forget about buying public REITS, gather 100 of your closest friends and start your own private one.

Jul 25 08:42 PM