Put Stock Profits to Use in Real Estate

This sounds sooo self serving! However, profits from virtually all stock indices have been absolutely outstanding. It may very well be time to take some of those gains and diversify into a separate asset class. As a very active Real Estate Broker, my clients’ greatest mistake in the huge run-up in 2005 was not heeding advice to “take some off the table” believing the mercuric rise would continue indefinitely. It was a display of pure GREED! Although stocks climb a wall of worry, the red flags gathering seem to show we are beginning to approach much more than a wall. Rather, it may be more like the small rise before the edge of a canyon cliff!

Decisions are difficult to make without the clarity of solid information and the confusion from differing sources. For instance, the January employment numbers showed 129,000 (revised) new jobs, which was above the revised 84,000 jobs added in December, though neither was robust! It conflicted with the Household Survey implication that 616,000 new jobs were created in the economy, which would be euphoric.

It’s a statistical anomaly, though, as John Hussman explains. January is a Bureau of Labor Statistics adjustment month. The increase of 523,000 people in the US labor pool skews the January numbers. John Hussman further explains that it is not unusual as two prior ominous times easily illustrate:

1. In January 2000, household employment figures jumped by 2,036,000 jobs.
2. In 2003, they jumped by 871,000.

The Main Stream Media failed to discuss this very relevant statistical adjustment implying a huge explosion in employment. Employment is soft at best. Hours worked continues to decline. GDP has declined to under 2%. The Federal Reserve is still committed to its asset purchase tapering. Capex spending is stagnant, and the credit markets continue to shrink. Civil unrest globally is rising and several nations are on default watch. The markets may continue to rise, but cash flowing assets will be valuable in whatever environment prevails.

This is the self serving part
I am not advocating new money, but a transfer of funds from one risk asset to another. It is time to buy conservative cash flowing real estate to preserve an income stream against volatile or declining stocks.

Real estate is long-term, generally 5 years or greater. Although subject to declines in value, as any financial asset is, any decline should be less severe than the bubble years of 2004-2006, and would probably be contained to well less than 20%. Further, high quality rental properties such as Class B apartment units or well located single family homes will probably fair even better. The huge population of former homeowners who have lost properties through the foreclosure process or short sales will become eligible to purchase again in the next few years as their financing penalty period expires. This will cause pent-up demand to be unleashed. This should drive the next cycle starting in 2016 as I see it. These former owners, plus the annual increase in household formations, will fill the available rentals. Should one of the red flags around the world cause a disruption to securities markets, these rentals will continue to flow cash.

Not all real estate will be suitable, and consultations with Tax Advisors, Financial Planners, and a good RE Broker is advisable. Retail may be very negatively impacted, as it is subject to both changes in the economy and changes in marketing and sales via the Internet. Medical, entertainment venues, properties with Class “A” tenants and some government entities such as the IRS will probably qualify as strategic real estate, and should also provide dependable cash flow. Conservative long-term financing may be appropriate, as there are many models forecasting much higher rates in just a few years. Current rates may look extremely attractive in the next cycle.

It may be time to become a little more conservative. Good to excellent properties that are real tangible assets with cash flow components should be very dependable. They will have the flexibility to adjust to conditions, and should perform well in good markets and maintain an income stream during bad markets. That will help mitigate downturns in equities and a downturn in general business conditions. This strategy will keep cash flowing into accounts when perhaps all others have stopped. As always, my best to you all.

This article should interest investors in iShares US Real Estate (NYSE: IYR), SPDR S&P Homebuilders (NYSE: XHB), Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), Citigroup (NYSE: C), J.P. Morgan Chase (NYSE: JPM), US Bancorp (NYSE: USB), Pultegroup (NYSE: PHM), K.B. Home (NYSE: KBH), Toll Brothers (NYSE: TOL), Annaly Capital (NYSE: NLY), American Capital Agency (Nasdaq: AGNC).

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