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Don’t Get Suckered by the Latest Real Estate Fad

Because I’m a value-conscience income investor, I’m skeptical of every hot investment trend.

That’s because nothing new blooms under the sun.

Residential real estate is the latest hot recyclable investment to capture investor interest… and dollars. Single-family residential properties are today’s Justin Bieber, even if they are still yesterday’s David Cassidy.

Single-family residential rental properties are nothing new, but today there are new players repackaging properties as new investments.

Single-family residential properties have historically been the domain of the individual investor and small partnership: a few homes would be bought and rented. In a few years, or in a few decades, they would be sold to capture capital gains. It was all very mom-and-pop and very hands-on.

Today, there’s a new twist and a new marketing ploy. Big institutional money has moved into the single-family rental space. Private-equity firms have spent billions of dollars to acquire thousands of single-family residential properties.

The numbers are staggering.  Never before has institutional money flowed into the housing market with such gusto. 

Blackstone Group (NSYE: BX) has spent $7.5 billion to buy 40,000 single-family homes. American Homes 4 Rent (NYSE: AMH) has invested $2.5 billion.  Meanwhile American Residential Properties (NYSE: ARPI) bought 4,000 homes at a cost of $500 million on 4,000 single-family homes. And the list goes on…

Now these companies are lowering the velvet rope to allow you access to their insight and prosperity.

You can buy shares in REITs including American Homes 4 Rent, American Residential Properties and Silver Bay (NYSE: SBY). I imagine it’s a matter of time before Blackstone forms a REIT to unload its single-family properties. It’s already drawing plans to sell bonds backed by rental payments on these properties.

Wall Street loves to sell when the market is hot. And that’s when its best to stay away. These big investment firms aren’t charities. Their goal is to cash out at a profit, and often at your expense.   It’s apropos to  equate Wall Street with the used-car salesman who spit-polishes the rust bucket to imbue it with the illusion of permanence and quality.

A recent article from Bloomberg Businessweek confirmed my concerns. The article reveals Colony American Homes, a division of Colony Capital, has found tenants for only 51% of the 9,000 properties it owns. As for the targeted REITs, American Homes 4 Rent, American Residential Properties and Silver Bay Realty Trust are money-losers. Of the three, only Silver Bay has sufficient cash to pay a dividend – one that yields a meager 0.30%.

I recommend sticking with a more established and conventional way to earn income from the housing sector. I recommend buying an individual rental property in a location that hasn’t been infused with institutional money. If you have no interest in being a landlord, consider conservative apartment rental REITs like Associated Estates Realty Corp (NYSE: AEC) or AvalonBay Communities (NYSE: AVB).

My preference, though, is to stay away from the residential real estate market.  To be sure, there are well-run REITs and worthwhile individual properties to be found. But due to all the hype, prices are high and yields are low.

Right now, better value can be found in commercial properties. In High Yield Wealth, I recommend several commercial REITs that are financially sound.  These REITs are established firms that have a long history of consistent dividend payouts.

Best of all, these REITs offer healthy yields of 6% to 9%. That’s far more than you’ll ever earn from one of these residential REITs.

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