Helping Clients Tiptoe Back Into Real Estate
As real estate markets across the U.S. recover from their long swoon, homeowners’ sighs of relief are practically audible. Financial advisors, meanwhile, are again fielding requests from clients to put real estate back into their portfolios for diversification. Naturally, experts are trying to find techniques that might protect investors against even a partial repeat of the 2008 disaster.
Some advisors recommend sticking close to home when investing in real estate. Richard Spillane of Spillane Money Management in Woburn, Mass., which has $12 million in assets under management, says his clients buy apartment buildings or two-family homes in neighborhoods they know well, partly for the cash flow from rentals and partly for diversification. They like properties “they can get their arms around, literally,” he says.
And Elke Mariotti, a CFP and an agent with Signature Premier Properties in Huntington, N.Y., who offers financial planning on a fee-only basis along with real estate guidance, says few of her clients are comfortable investing in far-off property. They prefer buying local because it’s simpler, she says.
For such investors, a property they can inspect and monitor themselves may feel less risky than one entrusted to an agent miles away. But one theory suggests that’s not necessarily the best way to guard against loss. A study published in the January issue of The Journal of Urban Economics suggests that real estate values in regions where land supply is limited, such as Manhattan or Silicon Valley, have historically been far more volatile than where land is abundant — even in the large urban centers of Texas or Iowa, for example.
The researchers decoupled land parcels from the structures built upon them in 23 U.S. metropolitan areas and tracked their prices from the mid-1990s to the present. They found that the land’s value was far more volatile than the buildings’. And prices were more volatile in coastal cities than in the middle of the country.
“[H]ome prices and commercial property prices will be more volatile, all else equal, in areas where land represents a larger share of real estate value,” write the authors, an American Enterprise Institute scholar, a member of the Federal Reserve’s board of governors and a JPMorgan Chase economist.
Furthermore, says co-author Stephen Oliner, of the American Enterprise Institute, it doesn’t matter whether an investor chooses commercial or residential, direct ownership or REITS. Geography is what counts.
Home vs. Office
Other experts think what is more important than where when it comes to sound real estate investing. Randy Anderson is chairman of capital markets for Manhattan-based Bluerock Real Estate, an investment firm with more than $1 billion under management. For a client seeking stable earnings from real estate, the “multifamily [home segment] tends to be less volatile,” he says. “Office buildings, more so.”
Anderson scoffs at the notion of avoiding the U.S. coasts. “There is a reason why those institutional investors go there,” he says. “The middle of America underperforms those coastal markets. If you are hoping to generate a profit, you are not going to get it in the Midwest.”
Anderson says real estate makes a great portfolio diversifier “because the sector has a low correlation with the stock market.” But that doesn’t mean investors should look to it for stability. To make money, he recommends that advisors help their clients find “high-quality properties in supply-constrained markets, but with good-quality sponsors who have modest leveraging,” he says.