Associated Estates Realty: A Winning REIT Investment

| About: Associated Estates (AEC)

Call up a real estate agent today and ask them what they are doing. Chances are, they are either at a bar drowning their sorrows or, if they are smart, they are putting the finishing touches on their resume.

The high-flying days when homes sold themselves for more than their asking price and just about anybody could be a successful realtor are over. The brutal headwinds of a slowing economy, a crazy-tight credit market, and the collapse of a major industry bubble are shaking all but the most successful realtors from the vine.

I called on a very prominent local realtor today. While you could tell she was glad to have a reputation strong enough to keep her in business, she is really worried about the mortgage industry.

“I have buyers that can easily afford these homes and are getting great deals, but we have to jump through hoops to be able to get them a mortgage,” she told me.  “Yesterday, I had a settlement that required three attorneys just to handle the lender’s outrageous requests.”

The credit crisis is threatening to topple what is left of the real estate industry.

Painful News

Look at the figures trickling out of the sector this week. Home prices in July fell more than 16% from where they were at the same time last year.

That means if a person bought a $300,000 last year with zero money or even ten percent down, they are almost certainly sitting on an upside-down mortgage, as the house is worth just $252,000.  It will take years to gain any real equity on that house. Those buyers will be financially handicapped for the rest of their lives.

Whose fault is it? It is certainly not mine or yours as everyday responsible taxpayers, but that is an entirely different subject.

Whenever you have major turmoil in an industry and such a dichotomy between winners and losers, there is always a profit opportunity. That means it is time to go shopping for real estate.

One of the best ways to invest in the industry without the hassle of buying and selling homes or land is to purchase shares of a real estate investment trust, commonly called REITs. The trusts use their investor’s money to take a stake in real assets and do all the hard work. All the investors need to do is sit back and cash their semi-annual dividend checks.

Invest in What?!

After hearing all the horrendous news about the crashing real estate market lately, most investors are scared to even mutter the word REIT, let alone invest in one. That is exactly what makes this a great profit-making opportunity.

Remember my cardinal rule: Invest when no one is looking.

Take a look at Associated Estates Realty (NYSE:AEC). The trust is paying an annual dividend of 5.5%. It is a safer yield than many equity investments right now. It is a return impossible to meet in the cash markets. And the appreciation potential is far greater than any debt note.

As the real estate industry bottoms out and starts to rebound, nearly every REIT will appreciate in value and its payouts will increase. Many financial experts argue REITS almost always lead the economic rebound, as the nation puts money back in their houses before their 401(k)s.

The key to finding the right REIT is to find the one with the best property holdings, with the best management and the best leverage. I like Associated Estates because of the combination of its high profits and therefore high-dividend yield (all REITS must pay out the vast majority of their earnings to shareholders) and its long-term net asset growth rate of over 25%.

The trust is growing at a very fast and very profitable rate. As the market turns around, the REIT’s fairly high leverage ratio will allow it to exponentially increase its profitability.

By no means is this the only REIT worth buying right now, but it is one you should pay attention to. If you do your homework, you should easily find many more that suit your needs.

Just because an industry is in the dumps right now does not mean it will be in two or three years. Remember, this is a highly cyclical economy. Real estate prices will be soaring before you know it.

And if you follow my advice, hopefully so will your REIT investments.

Disclosure: none