Recently a very good friend of mine approached me, he had found a really good deal in real estate, here in the valley. This friend is a very savvy investor, and probably has forgotten more about commercial real estate than I will ever know. I have the utmost respect for him, and I appreciate that he often calls me to see if I want to participate in various projects.
This time he called because he had found a project he could buy very cheaply, and it would immediately cash flow at more than 5% — and the structure was only about 50% occupied, and he was sure that he could get the rest occupied pretty easily; after all, it is making a great return now, and so he can lease the rest of the space at a substantial discount and still do very well.
In most market conditions I would agree with him, and I would very likely participate with him. But the same thing that is affecting most private equity is also affecting my check writing hand: the unknown. We are in uncharted territory here, with interest rates at historical lows, the US going through an almost unprecedented deflationary cycle, and continuing incredible decisions by the government, reacting almost in a panic.
So I thought, what would I do if I had a bunch of money burning a hole in my pocket? Where would I most likely invest it? I usually take a long term view; I invest for the 20 year return, usually, not for the quick turn. But my philosophy is a little different today. Because my crystal ball broke about 6 months ago, I am looking for investments offering high liquidity and acceptable returns. Cash in the bank is hard to beat, except maybe US treasuries are safer (maybe!) That merry-go-round is sure to stop sometime soon.
So I turned to the equities markets. There are some interesting stock plays, in particular Canadian oil & gas trusts, that I like a little better than commercial real estate in Phoenix. I like oil, because the world continues to need lots of it, and the price is apparently controlled, to a great extent, by a small middle Eastern group dedicated to keeping the price high. Plus, I think we are past peak oil (meaning we are on the declining side of the availability curve). We won’t run out anytime soon, but new discoveries are more rare and more costly to develop. Lots easier to drill a gas well in Texas than in the Arctic, aside from government regulations.
If you google “Canadian oil trust” you will find all sorts of things. One in particular is paying a 20% dividend right now. So I can place an order and get it filled immediately, and get a 20% return. If I need the cash in a month, I can place another order and get the cash 5 days later. Try that with real estate! Sure, I have the risk that the price of the equity will fall — but I have the same risk in the real estate, and I don’t have the liquidity!
I work in real estate every day. I used to buy and sell properties for my own portfolio fairly regularly; however in this market I am content to get a commission. The rewards are far lower than direct investment, but then so is the risk. So for now you’ll find me being more of an agent and less of an investor. At least until I get that crystal ball fixed.
“One in particular is paying a 20% dividend right now. So I can place an order and get it filled immediately, and get a 20% return…”
You would have to hold the stock for an entire year to realize the annual dividend yield of 20% – you’re right though – can trusts are a great way to earn income… keep in mind that because the stock price is low the yield is really high… the company could reduce the dividend if their profits drop in the meantime…
Exactly right. The investments are similar in terms of return, I think. If I have an investment property, someone could move out — and I have to hold it for a year to get my 5-8% return! The equity is more liquid. If you believe that real estate prices will rise, then that's the investment for you. If you think oil & gas will rise, perhaps that's a better place. Everyone has to make their own decisions based on what they know and what they think the market will do. I'm just pointing out some alternatives. After all, I really want to own and sell real estate!