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Real Estate to REIT


moody202
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I have a portfolio of Real Estate holdings that have worked decent for me over the past 3-4 years. However, as the price of these properties has increased, I am tempted to switch into REIT investments. My thought process is that the properties generate about 8-10% per year at the current market prices. If I am able to generate 8% with REIT's, I would rather do that and not deal with the work that comes with owning Real Estate.

 

Given that REIT's have gone up significantly over the last couple of years, I don't want to mistime and enter at near peak prices. My question is which REIT's should I look at and what returns can I realistically expect from them?

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I would be very careful with REITs at this stage.  We are a long way into the current cycle and prices have been juiced by additional factors, low interest rates and foreign money in particular. 

 

Non-traded REITs are likely abhorred by most on this board and there is merit to being skeptical of them generally (fees are high and lots of conflicts of interest exist with the outside managers).  That being said, one portfolio I like is KBS III.  I primarily like it because the REIT bought its first property in 2011 and has continued to raise money and purchase properties throughout the real estate recovery.  The year 2011 was right at or near the bottom of the real estate market and thus a significant amount of this REIT contains properties purchased at attractive cap rates. 

 

I also like the manager of the portfolio, Keith Hall.  As I understand it, Hall worked at Drexel Burnham with a number of people who eventually ended up at Oaktree Capital.  Hall implements a value strategy.  He likes properties that are not fully leased because he can buy them cheaper, inject capital if needed, and bring the occupancy up to increase cash-flow and therefore value. 

 

The current dividend is over 6%.  I think some margin of safety exists mainly because of the timing the portfolio was assembled (it seems like the probability for some capital appreciation is good).  However, I wouldn't expect any huge total returns.  My anticipation is in the upper single digits annualized over time.  The high internal expenses of these instruments really act like gravity on returns.  Because this is non-traded, you can still buy today at a fixed IPO price.  However, keep in mind you don't have liquidity with these instruments either. 

 

Full disclosure: I am a shareholder.

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Guest Schwab711

I like SELF and it would be awesome if you had the money to become a major shareholder, mgmt comp is excessive (they make the dividend instead of pay what they make). 10% yield ex-investments and trading at 60% of NAV.

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