Get Ready For Renter Onslaught With iShares' NAREIT ETF

Regular readers know that I am involved in several aspects of the real estate industry. As I recently stated in a national brokerage monthly real estate outlook meant for institutional investors - by having personal experience with current trends, now is the best time in the last thirty years or more to appropriately purchase existing rental real estate. Actively managed real estate holdings are the best choice for income and tax advantages. Be your own little Donald.

Another way to play is through passive investment in rental real estate. From a cost efficiency standpoint, my somewhat contrary opinion is to recommend iShares' FTSE NAREIT Residential Real Estate Fund ETF (REZ). This ETF has been battered in an unforgiving market, but fear not. The rental market is in the process of expanding in occupancy, demand, rents and quality of tenant. The mortgage (and political) meltdown has created a situation where most potential homeowners cannot get credit without excellent to superb credit and lofty stips. Spell R-E-N-T-E-R.

My personal experience is that smart money is going into rental single family homes, multi-family units and apartment complexes. And brilliant money is going into foreclosed apartments for rehab and re-positioning in what is going to be a robust rental market sooner than later. Inflation with the government printing presses rolling 24/7? Advantage, rental real estate.

REZ is designed to correspond to the price and yield of the FTSE NAREIT Residential Index. The ETF is a non-diverse roster of companies that own, manage and/or invest in residential apartment properties. The two largest holdings are Equity Residential and Avalon Bay Communities at 23% and 14% of the portfolio, respectively. Other top holdings include: Apartment Investment and Management, UDR Inc., Home Properties Inc., Camden Property Trust, BRE Communities, American Campus Communities, Essex Property Trust Inc. and Equity Lifestyle Properties. All of these comprise approximately 5% each of the remainder of the portfolio. Twenty-one companies are represented in total.

The ETF trades at $41.81, very close to net asset value. Sporting a dividend of 4.85%and trading a respectable ten-day average of 85g shares, the $25m ETF is your best bet for this sector of real estate.

With a new financial era forthcoming, toss out past performance. Rental real estate is poised to reward investors with a significant total return. Own rental property if you can. Buy REZ as an excellent second choice.

Comments

[buyitcheap:]

In your total return, do you see "appreciation" as part of the equation at some point or just cash flow for now?

2008 Sep 24 02:55 PM

[Jakester:]

A yield of 4.85% with possible financing issues for the underlying companies in the future? Doesn't sound that compelling to me. That is, it doesn't seem like one is being properly compensated for the uncertainty when I can grab a CD at 5% and sleep like a baby.

2008 Sep 24 07:02 PM

[bernie 1:]

Hi Jakester,
I just checked on your 5% CD that will let you sleep like a baby. Well baby,you better check your numbers because the first 5% CD that I found doesn't expire until 2013 & you'll pay par at 100 & get your dividend twice a year.

2008 Sep 25 08:02 AM

[nobull:]

I agree. Cash is king and among investements, cash flow is all that matters now. While I dont think you can get any appreciation for a few years to come, as long as youre cash flow positive, rental investing beats out all other investments.

2008 Sep 25 09:13 AM

[henarl:]

Even better than residential rental real estate is mini-storage. With people losing their homes to foreclosure and moving back in with their parents, or some other method of combined living arrangements, they will need to store their household furnishings. Storage does not have the management and maintenance problem of residential property and the return on equity is just as good.

2008 Sep 25 03:19 PM

[Griz:]

What?! It sound like there are still some clueless people out there who think that real estate (in any form) might actually a good investment. This was a wicked funny (ie. pathetic) article.

2008 Sep 25 04:39 PM

[carey_jim:]

REZ reached a low in January 2008 of close to 35 and quickly bounced back to around 40. From then on, it has been bobbing between 40 and 45 with the exception of a brief flirtation with 37.

When you consider that REZ was only went over 50 for very short periods, these recent fluctuations represent nothing more than a lot of profit for alpha traders bouncing back and forth between SRS and REZ.

When Paulsen starts buying, count me in.

2008 Sep 25 06:01 PM