Alternative Investments – Real Estate

Skyline

Alternative Investments can provide lucrative returns that are unavailable by investing in the stock or bond market. In earlier posts, we discussed alternative investments in farmland, rooftop solar systemprivate equity, and collectibles. In this article we discuss investing in one of the most popular forms of alternative investment – Real Estate. Note that investing in farmland is also a form of real estate investing, but I figured that farmland had a special case which deserved its own post.

As mentioned, investing in real estate is one of the most popular forms of investing as it is easy to understand and provides one of the most basic needs of human survivability – shelter. There are multiple options for investing in real estate: one can invest in a piece of land and hold it for capital gains, or invest in a house/condo/multi-family units and rent it out to generate cash flow while holding the property for capital gains or purchase shares in a real estate investment trust (REIT) company.

Alternative Investments – Real Estate

Investing in a property is usually capital intensive, as a downpayment is usually necessary. However, due to the availability and popularity, investing in real estate investment trusts (REITs) is a breeze with companies easily available to trade on the stock exchanges. Investing via REITs provides some advantages as well – in that you can compare one business against another and pick to choose the best one. Also, when buying shares in REITs, it is easy to liquidate funds which may not be possible with owning your own property. A few weeks ago, Robert Baillieul guest posted on this blog on how to invest and collect monthly rents without becoming a landlord.

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We Bought a House!

The search is finally over! We finally bought a house. After a lot of dilly-dallying over a period of months, and trying to figure out if we should buy a house or simply continue renting, we finally made the call to buy and completed this task last week.

We may invariably be buying at the peak of the housing bubble here in Canada as the chart from The Economist illustrates below. But then again, we may not. Nobody knows for certain where we are in the cycle. But for now, money is cheap with interest rates at 1% and prime rate at 3%, and the real estate market is on fire.

The housing market in Ottawa is quite ridiculous, to be frank. Banks and lenders are falling over each other to push money onto borrowers, with the city’s big part of the population working for the government, with secure jobs, secure pensions (for now) and what-not. Unfortunately, this is not true in my case, where I do not have any job security nor pension from my workplace. While shopping, we saw some houses in extremely deplorable conditions with an asking price of over $500K. We couldn’t figure out whether to laugh or get annoyed when we saw two listings of houses with a pathetic picture of the outside and a headline “No internal viewings allowed. Buy for land value only”. And this was not really the best neighborhood in town! That sounds like things are getting out of hand, and we contemplated holding out until the bubble pops, which could happen either now or in a few years. The only consolation is that house prices in Ottawa aren’t as bad as Vancouver or Toronto where average house prices are closer to $1M mark.

Why buy?
Currently, we are renting a one-bedroom apartment in downtown Ottawa, which isn’t big enough for the two of us and no space for us to grow. The flip-side was that we rent a bigger place but between renting and buying, the difference wasn’t much and we decided that in the long run, we want to own a house. We ended up buying a place which fits plenty of our criteria – something well in our budget, relatively close to downtown, big enough for us to grow into (a 3-bed, 2-bath house), good neighborhood, close to one of our jobs (walking distance from my wife’s work), good school district etc.

This purchase obviously affects our investments and readers will notice a drop in our passive income going forward. I have sold off my mutual fund holdings that I intend to use for our down payment, but still need to sell a few more of our investments to cover our down-payment. I intend to sell off most of our existing ETFs and a couple of high income stocks as I want to keep holding the dividend growth stocks. This upcoming selloff could result in a possibility of us missing our target of $4,000 in passive income this year. But we are still happy about the decision – a lot happier than we ever anticipated.

The closing date is in July and we can’t wait to move into our new house.

Recent Buy – Realty Income Corp (O)

I added to my position in Realty Income Corp (O) and doubled my stake. Realty is a REIT that invests in commercial real estate across the US. Realty Income Corp has long term leases with tenants that are spread across 200 companies and 47 industries. The Company has over 38,000 free-standing properties, typically under triple net leases (tenants pay taxes, maintenance and insurance).  The Company boasts a 98% occupancy rate with major tenants including FedEx, Walgreens, Family Dollar, LA Fitness, AMC Theatres and Diageo.

Corporate Profile (from Google Finance):

Realty Income Corporation (Realty Income) is an equity real estate investment trust (REIT). The Company is engaged in acquiring and owning freestanding retail and other properties that generate rental revenue under long-term lease agreements (primarily 10 to 20 years). The Company has in-house acquisition, leasing, legal, credit research, real estate research, portfolio management and capital markets. At December 31, 2011, it owned a diversified portfolio of 2,634 properties with an occupancy rate of 96.7%, or 2,547 properties leased and only 87 properties available for lease. It leased properties to 136 different retail and other commercial enterprises doing business in 38 separate industries. It properties are located in 49 states, with over 27.3 million square feet of leasable space, and with an average leasable space per property of approximately 10,400 square feet. In January 2013, it acquired American Realty Capital Trust.

Recent Buy Decision

Realty Income Corp has a track record of having paid 520 consecutive monthly dividends, 74 dividend increases and 65 consecutive quarterly increases. Realty Income has manageable debt, with a debt/equity ratio of 1.03, and more importantly, all of its debt is fixed-rate. So its interest payments will not be affected by rising interest rates unless new debt is undertaken by the company.
Realty Income Corp has not performed well in 2013 (down 7%) and the last few hours of the Dec 31 trading day saw more selloff which was probably last minute selling for tax purposes. I decided that it was a good buying opportunity and increased my stake from 30 to 60 shares. My current position provides me with $10.93 in monthly dividends and $131.16 in annual dividends.
A summary of the stock:
  • Symbol: NYSE: O
  • Quote: $37.33
  • 52-week Range: $36.58 – $55.48
  • Yield: 5.86%
  • 5-yr Dividend Growth Rate: 5.26%
  • P/FFO: 16.5
My full list of holdings can be found here.

Ottawa Real Estate

Enough has already been written by countless others about the Canadian housing market, so I wont ramble on about how overpriced houses in Canada are. Canadians now hold a household debt-to-income ratio of 163.4% (up from 162.1% in the first quarter of 2013). Following are some charts from The Economist, comparing the historical real estate prices between Canada and US since 1975.
My wife and I are currently renting an apartment in Ottawa, Canada and are considering buying a house for the past few months. We are thinking about buying a house in a year or two (2014-2015), but the state of the market just leaves me in disbelief. The Ottawa real estate board states that the average home prices are $346K (source). The inclusion of suburbia, the remote outskirts and the rougher parts of town bring down the average prices as any good house in the city has a listing price of $500K-$800K.

Canada Real Estate

Canada Real Estate

Canada Real Estate

Canada Real Estate

Canada Real Estate
The 4th chart is really interesting which shows that with the current state, its much cheaper to rent than to buy a house. But having considered all, the big question still remains: Do we wait for a correction or just buy in while the interest rates are down? 
What are your thoughts?