The fall is a wonderful time to take long walks in the Northeast. Not only does getting up and out help solve problems I have been working on, the scenery is nice. The leaves have turned and it is still warm enough to enjoy the view. I particularly like walking around Saratoga Springs when I am there in the fall. In addition to the racetrack, the houses and buildings are nice to look at as they carry a lot of history. The structures tend to evoke different eras and you find yourself wondering what living in the city was like when each property was new. In recent years, the prices on houses I see advertised have gone up quite a bit.
Additionally, there is a lot of construction going on in relation to new townhouses and condos. Down the street from the track, an old college dorm was razed after racing season to make way for new housing. A number of years back, rows of new townhouses appeared on my walking route. Given the price appreciation and the development, I often find myself wondering about the housing market. Does it make sense to live close to the track and the city or are you better off farther away and investing the money you save?
Such questions come up no matter where you live. In following, we review a couple of new books dealing with real estate this month. The first tackles the rent versus own question, and which is the better path. The second addresses investing in Real Estate Investment Trusts, for those who want some exposure to real estate in the equity market in addition to (or instead of) owning actual property.
The Wealthy Renter – Alex Avery – Dundurn (October 2016)
The most famous advice on house purchases in an investment context was probably made by Peter Lynch in One Up On Wall Street (1989). It probably won’t come as a surprise that he came down in favor of the endeavor and for many of the reasons friends and relatives are often fond of. There is the favorable tax treatment on capital gains as well as the mortgage deduction. Lynch notes the extra care people take in choosing their house, the fact it is by nature a long term proposition, and is a leveraged investment on terms that are usually good. The truth is for many people a house ends up being a forced savings program. This enforced frugality often results in the majority of their net worth when it is paid off. He also notes it is an investment they are not scared out of easily or a price they track daily in a worried state.
The famous mutual fund manager recently was in the real estate news after listing a vacation home in Arizona for $14 million. According to the Wall Street Journal, the site was purchased for $4 million over a decade ago. The amount of money put into the property was not available in published reports.
We often read of large gains in real estate over decades, and sometimes hear about them from people we are close to. So why read a book that touts the advantages of renting as opposed to buying? Because one size doesn’t fit all and shouldn’t what is often your largest investment be examined in detail?
In The Wealthy Renter, author Alex Avery recommends looking at all the costs specific to owning a home. These include property taxes, which are paid each year. There is also maintenance. When the hot water heater stops working, it is always dealt with (painfully) but rarely does a homeowner log the replacement cost into a spreadsheet to be used to calculate the ultimate profit on a property. The main point Avery drives home is that people forget these issues as well as the return rates an investor could get if they invested money tied up in the home, used for taxes, or maintenance.
The author makes a point of separating the land itself from the house built on it. He sees only the land as an asset that appreciates in most cases. The house itself depreciates much like a car does. A roof will wear out; furnaces and air conditioners have limited lives. Returning to high priced real estate, we often see this concept when a wealthy person purchases a mansion on a large plot of land. Sometimes they decide to knock the house down (often less than 40 years old) and build a new one.
Avery examines location as well as supply and demand factors in determining the appreciation and depreciation in prices. Like any investment, the more information you have the better the decision you make. He brings up the subject of implied rent, meaning even if you own a house the use of it has a monetary value. You can figure out this value by opening up the real estate section of your local paper and examining rental rates. In Avery’s view, you are paying this amount to yourself. I have often seen home ownership in this light, sort of like a bond kicking off income each month to pay living expenses.
The author also comes up with alternative choices for money that usually is tied up in a home. He looks at the costs involved in buying and selling houses, evaluating them as you would any investment. He points out issues with liquidity, settlement time, and transaction costs. He compares this with options like dividend paying stocks and examines the historical record. As is the case in the United States, prices while much less volatile than stocks have racked up inferior returns over long periods. (This is not the same thing as saying an astute investor cannot generate superior returns in real estate.)
This is a Canadian book and while sections of the text cover areas specific to that region, the larger questions raised apply to domestic buyers. For readers aware of the Canadian market, the word bubble is often used these days and the government has taken some steps recently to try to cool the market. These include surtaxes on foreign purchasers and extra scrutiny on homeowners’ ability to pay.
The chapters Avery uses to compare the costs of renting and owning in major Canadian cities present a blueprint for examining housing as an investment in any neighborhood. Even if you are a committed home owner, you want to make sure you get the most value for your dollar.
Owning a house offers stability, but may limit the ability to move towards more lucrative employment opportunities. Avery points out it is easier for a renter to pick up stakes and move; the costs involved are much less than selling your house. The increased flexibility could be used to decrease commute time or have a wider range of options for income.
If the largest benefit some homeowners enjoy is a ready-made investment program, Avery offers some different avenues. These include employee matches on retirement accounts and automatic investment programs. They require more self-control than a mortgage, however, and as a forced savings program it is really hard to match the discipline owning a home delivers. The point he makes though is that if you can recreate that discipline in other investments your rewards may be greater.
I am agnostic on the concept of renting versus buying. For some people, purchasing will make the most sense while for others the opportunity costs will drive a different decision. For those whose living involves a lot of travel or moving, renting may make more sense. The philosophy of the book is a good one though. Fire up that spreadsheet, look at all the costs involved as well as the benefits and make the best decision for your personal situation.
Since most of the literature favors the buying equation, why not look at the process from the opposite view? As with any investment or gamble, the better your data the better your decisions.
As of late October, the book was available as an Amazon Kindle book at $7.99 and at $15.37 as a paperback. The Barnes and Noble comparable prices were $8.99 and $15.29.
The Intelligent REIT Investor –Stephanie Krewson-Kelly, R. Brad Thomas –Wiley (August 2016)
As this book points out, a major development in investing in Real Estate Investment Trusts occurred this summer as Real Estate was moved into its own GICS Sector. GICS stands for Global Industry Classification Standard and is used to determine stocks in sector funds that use an MSCI or S&P index. REITs were formerly part of the financial sector. It is one sign of the growth of this particular type of investment.
The authors start out with a definition of a Real Estate Investment Trust as “an entity that receives revenue through owning or financing income-producing property” and quickly move on to why one might invest in the area. They also note the one feature that many people associate with REITS, that these entities distribute 90% of their taxable income in dividends to shareholders. In return, they receive special tax status allowing investors to avoid the double taxation often associated with investing in most corporations.
From an investor’s point of view, investing in REITs allows exposure to real estate with the added liquidity an exchange traded equity provides. For instance, if you are a renter it is one way to make sure you are exposed to real estate.
The book contains a wealth of information on specific companies set up as REITs. There is everything from credit ratings to detailed performance of REITs in different industry groups over the decades. Treasury rates and S&P 500 index returns are included for comparison. There is data on REIT performance and industry growth dating back to the 1970’s. Also included is a large amount of material on how to analyze real estate companies and how their financial statements differ from companies in other sectors.
Focusing on specific REIT industry groups has its advantages. Here you can avoid sectors you deem too risky or without growth potential. The authors make an interesting point pertaining to Office REITS. The way we work has changed over the last generation as they illustrate using the square footage per employee allocated by employers. More people are working remotely and trends like this impact the industry.
With health care spending taking up more of people’s budgets each year and accounting for a greater share of the country’s output, it makes sense to know the major players here. The book is full of tables and charts, letting you know the components of each part of the REIT spectrum. One could go deeper on their own and compile Morningstar or S&P data to come up with valuations for each entity in comparison to history.
The text provides a road map for investing in REITs. Whether an investor’s intention is to buy a broad based index fund, or dig into the specifics of individual companies; a starting point is provided.
As of late October, the book was available as an Amazon Kindle book at $11.99 and at $19.46 as a hardcover. The Barnes and Noble comparable prices were $16.99 and $19.29.
In this article, we reviewed a couple of new books that look at real estate with an investor’s eye. Whether you rent or own, your cost of living is part of your investment plan.