Talk about money: Look no further than real estate investment trusts in gloomy market

There is often opportunity amid gloom. And, wow, do we have a lot of gloom in the real estate market:
– A recent report on housing sales nationwide showed prices have dropped to their lowest level in a decade. In response to the report, David Blitzer of Standard & Poor’s, appearing on CNBC, said industry professionals are “wondering if people don’t want to own homes anymore.”
– Wall Street sage Ed Yardeni, quoted in Barron’s magazine, said, “The housing market is beginning to smell.” Literally. Mold and mildew may cause some long-vacant, foreclosed homes to rot away and be bulldozed. That’s one way to reduce the supply of homes on the market.
– Closer to home, Scotts Valley Realtor Melanie Useldinger said, “No doubt about it. Prices are still dropping.”
My experience has been that when negativity is so widespread, it’s usually a good time to buy. For my clients, an easy way to invest in real estate is through real estate investment trusts.
REITs (pronounced “reets”) are companies that own real estate and sell shares to the public, much as mutual funds own stocks and sell shares to the public. When you own shares of a REIT, you own a piece of a portfolio of properties.
Some REITs own residential properties, some own commercial properties. A key reason people invest in REIT is to collect dividends, the way investors own rental properties to collect rents.
Because of the way REITs are structured, the dividends they pay are not eligible for the low 15 percent tax rate like most stock dividends. REIT dividends are taxed as ordinary income, like a paycheck. So investors should consider putting them into tax-deferred retirement accounts, like IRAs.
A funny thing happened as I was researching REITs. I found that most of them are selling near all-time highs. Amid all of the gloom in the real estate market, the share prices of REITs have never been higher.
To explain this apparent disconnect, I spoke with Carol L. Kemple, an award-winning REIT analyst at the investment firm Hilliard Lyons in Louisville, Ky.
Foreclosures are widespread, she said, and people who lose their homes to foreclosure need to find a new place to live. Many of them rent apartments in complexes owned by REITs, and that demand enables apartment landlords to raise rents. That boosts the prices of residential REITs.
REITs that invest in commercial real estate have a lot of leverage with tenants, Kemple said.
“A REIT will own several properties,” she said. “If a retail REIT is negotiating with T.J.Maxx, for example, that REIT may have other T.J.Maxx stores that are tenants at other locations. Because the REIT is publicly traded, a tenant can look at their financial statements and feel comfortable that the landlord is not going out of business. The tenants don’t get to see that with a private owner.
“It’s difficult for a tenant to know if a mom-and-pop who own a little shopping center have a strong balance sheet,” she added, “so big tenants are willing to pay higher rents to REIT landlords in order to have that comfort and stability.”
That explains why I’ve had trouble finding REITs at bargain prices amid the real estate rubble. But I’ll keep looking.
Mark Rosenberg is an investment consultant for Financial West Group in Scotts Valley, a member of FINRA and SIPC. He can be reached at 439-9910 or mr********@fw*.com.