Apartments and Corn Fields: 2011’s Best Investments

by JT McGee

wheat field, farmlandI’ve been interested lately in the shift of capital due to lower and lower interest rates. As is always the case, low interest rate policy shows first in investments that spew regular and positive cash flow.

Should it be any surprise REITs, real estate, and (to an extent) dividend stocks have been smashing the market?

Probably not.

Earlier this year I myself explored the prospect of leveraging P2P loans with brokerage margin, an idea that still finds itself bouncing around in my head every so often. I’m not even so much that friendly with leverage. I mean I am in the sense that I’m more levered than your average PF blogger, but that’s a different scale – always levered Wall Street is killing me here.

Apartment Investments

Earlier this year I wrote my own prediction for commercial real estate, suggesting that a decline in office space demand would bring about an eventual shift from commercial to residential properties.

Reality decided to come around to the delusions in my own mind. No, commercial real estate developments aren’t yet being converted to residential property. However, commercial real estate firms are ditching commercial for residential development.

The Wall Street Journal reported names like Boston Properties Inc., Mack-Cali Realty Corp., and Simon Property Group, have each acquired land, broken ground, or completed new residential property developments.

The same article noted a few statistics on apartments as a real estate investment:

  • National vacancy rates run at 5.6%, down from 7.1% in the prior year.
  • Rents rose 2.4% in the past 12 months.

Who wouldn’t want to be invested in cash flow positive real estate against the backdrop of European Debt Crisis?

It’s not like it’s a bad business. The Commerce Department reported a 25.3% improvement in multi-family housing starts in November.

Party like it’s 2005! Not only is Uncle Sam subsidizing developers by keeping 250,000 homes off the market, but my boy Bernanke is keeping rates so low even brand new real estate makes absolute perfect sense!

Corn Fields

Speaking of cash flow, how about those corn fields?

Word on the street here is that hedge funds are actively involved in my local real estate market. Farmland is the new hot commodity as investors embrace cash flow and higher food prices. Om nom nom.

The boom is most certainly hot. In a recent article a Wells Fargo economist noted that farmland that once sold for 4 years’ revenue now sells for 6 years’ revenues. Reuters reports that farmland gained 25% in the November 2010 to November 2011 period. Nebraskan farmland was the hottest area for investment, with prices up some 40% year over year.

The benefit is multivariate; margins less capital expenditures for land are up considerably as food prices trend higher. But even still, it takes really cheap money to buy unimproved land in the United States, as the tax code does not allow for depreciation of land, a benefit most real estate investors enjoy tremendously on land improvements.

Wall Street Next?

I remain bullish on equities due to the same catalysts behind the boom in multi-family real estate and corn fields: money is cheap.

I still believe stocks are cheap – so cheap that CEOs of growth firms will start buying up other companies with leverage to keep up the growth stories. Of course, Wall Street didn’t provide nearly the same returns as residential real estate or farmland this year. I guess we’re now relatively undervalued?

Meh, probably not. Investors who run scared always run to cash flow.

I find it annoying; it’s the anti-thesis of low rates. Sure, present cash flows are great, but how about compounded future cash flows in a buyout? Nope. Still not getting the attention of investors? Okay – I’ll keep waiting. I never liked dividends anyway.

Seriously, our man Bernanke has never made a better case for debt-based investments. Granted, many people have a natural philosophical aversion to debt that won’t be shaken any time soon. I see no sense in trying to convert you if that happens to be your preference. But for the love of all things holy, the current environment is throwing mad money into cash flow positive investments to an extent we haven’t seen in a very long time.

Debt makes a disgusting amount of sense.

Anyone thinking about leveraging before the calendars are switched to 2012?

Photo by: klallier

{ 10 comments… read them below or add one }

PKamp3 December 28, 2011 at 02:10

Hope you’re right on the Commercial REITs – been riding them in a fund from TRP for years now.

On the corn fields – keep the subsidies rolling and the corn ethanol mixing with the normal gasoline. If those conditions hold corn will stay high, haha.

Reply

JT McGee December 29, 2011 at 17:50

What is it with you people and REITS?!?! (Replying to these comments backwards.)

Hey – speaking of subsidies, the ethanol subsidy just got whacked. Apparently they don’t need it with record high oil prices. http://usnews.msnbc.msn.com/_news/2011/12/29/9804028-6-billion-a-year-ethanol-subsidy-dies-but-wait-theres-more

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PKamp3 December 29, 2011 at 21:48

Haha – retirement accounts, my dude! Some of my accounts (well, Fidelity ones) have a brokerage window but the others lock you into mutual funds. Otherwise I wouldn’t bother with mutual funds, I’m sure.

And yes, across my portfolio I do have some form of a diversification strategy due to all the funds. But with all the single company stock I have and the stocks I buy elsewhere I have a lot more fun on the single-stock side.

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JT December 30, 2011 at 00:07

Dude, BRUFX if you have a choice in mutual funds. Father-son value shop that beats the snot out of Wall Street year after year. Probably best described as a “blend” mutual fund they find awesome opportunities with their relatively small AUM number.

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LaTisha December 28, 2011 at 14:41

It definitely looks like a good time to leverage. i’m still on the commercial REITs as well. I mean, there’s really no where to go but up, right?

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JT McGee December 29, 2011 at 17:49

For your sake, I hope there’s nowhere to go but up. I’m long on commercial real estate in the sense that I rent an office. 😛

No, seriously, commercial real estate may be a fantastic investment, but it’s too commoditized for my taste. YMMV.

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AverageJoe December 29, 2011 at 17:32

Dude, I am all about REITs in this environment. Great dividend and growth prospects through the roof. Dare I say that technology might be coming into the viewfinder as well? Maybe….

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JT McGee December 29, 2011 at 17:48

I’m leaving REITs for the birds you and LaTisha. Still not enough there for me to get excited, as I just don’t see the growth and dividends, to me, are “meh.”

I can dig tech stocks though, most notably WebMD (WBMD) and Cisco (CSCO.) I’m a value investor at heart, and those two firms are on my watch list.

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LaTisha December 29, 2011 at 19:09

haha! Don’t worry, you won’t hurt my feelings. But be careful about insulting birds. I heard there were some ‘angry’ ones around here somewhere lol

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JT December 30, 2011 at 00:08

Ha, they’re on my phone and those birds take way too much of my time away. 😉

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