Wall Street green with envy over rising tide of real estate investment
Wall Street green with envy over rising tide of real estate investment By James M. Woodard, Copley News Service      An increasing number of investors are becoming disillusioned with the volatile and often sluggish stock and bond markets and are diverting their funds into real estate investments. This trend apparently worries people who sell stocks and bonds. I recently participated in a telephone press conference, sponsored by the Zero Alpha Group, a network of eight major independent investment advisory firms. The main reason for the conference was to publicize what ZAG says are dangers of investing in real estate in 2005 -- an apparent attempt to reverse the flow of investment funds away from stocks and other financial market vehicles. However, some comments and suggestions offered by these financial wizards were helpful and insightful for people intent on participating in real estate investments. Here is a sampling of subjects they covered: -- "Continued weakness in the stock market means more and more investors are tempted to liquidate some or all their investment portfolios in order to pour their savings into such things as vacation homes, farmland, rental apartments and even airport hangars," one expert said. "While real estate is an integral part of a globally diversified financial portfolio, it's not the 'magic bullet' to investors who are frustrated with sluggish stock market returns." The group did have positive things to say about Real Estate Investment Trusts, a popular way to benefit from participating in ownership of large properties. "Not only are REITs a helpful tool in portfolio re-balancing, they can generate much-needed cash flow and, at the moment, are posting good yields. With a total return of 30.4 percent, REITs last year outpaced most other stock market benchmarks for a fifth consecutive year. REITs over the last five years have produced a compound annual total return of 22.5 percent, putting them ahead of the compound annual returns for the S&P 500, the Dow Jones industrial average and the Nasdaq." They also took a positive view of managed pool real estate investments. "Exposure to real estate also can be gained through direct ownership in a managed pool that focuses on real estate. This approach can be broadly diversified, thus it has a very low standard deviation. Also, owning real estate through a managed pool gives financial professionals a higher comfort level because they can get a clear sense of the credit and administrative processes behind the investment, which may be particularly important in a 'down' market in real estate." Participating at the ZAG conference call were James Wilson, president of J.E. Wilson Advisors; Steven Lugar, managing director of BHCO Capital Management Inc.; and Phil Kruzan, director of financial planning for The Foster Group. Q: Are second homes often purchased as an investment? A: More people are purchasing second homes this year than ever before. The key motivation is their investment value. Eighty-one percent of survey respondents to a recent survey by EscapeHomes.com, a Web site focusing on second homes, said they plan to buy a second home, which is an increase of about 13 percent over a year ago. Of those who said they plan to buy a second home, 41 percent said they will buy within the next two years. The most frequently expressed reasons for considering a second home: 1, investment potential; 2, retirement home; and 3, vacation residence. Factors most often considered in selecting the location for a second home: 1, proximity to recreation facilities; 2, warm climate; 3, strong rental market. With a higher comfort level about flying, more than one-third of those considering the purchase of a second home are willing to fly to the location of the property. About 57 percent prefer to drive. About 60 percent of respondents plan to buy a second home more than 500 miles away from the primary residence. The demographics of the second home buyer have shifted slightly in recent months. The survey found married people looking for second homes increased by nearly 10 percent, and the number of people with incomes over $100,000 increased by 26 percent. Age distribution, too, has changed. The survey shows a decrease in the 45-54 year old group, and an increase in the two age brackets below and above those ages. About 75 percent of respondents have either a college or advanced degree. Q: When brokers sell their own home, do they usually sell for a higher price than others? A: A recent report by University of Chicago economists showed that when a real estate professional sells his own home, it usually sells for a higher price than comparable homes of others, even when the marketing of those homes might be handled by the same professional. The report noted that the homes of professionals on the market about 10 days longer and are getting 3.7 percent higher sales prices than homes in similar markets handled by professionals for the general public. The economists make the point that homeowners need to hire independent appraisers to value their homes rather than depend on a real estate broker to when there is a commission relationship involved.