A Tale of Two Yields - Tips for Investing In Real Estate

From Robert Abalos’ ezine…

I love to bash MONEY magazine in this newsletter because quite frankly the advice this general personal finance publication offers is usually behind the curve and pretty bad. Instead of alerting readers of a trend to come that has real investment value, the magazine often urges them to join a trend which everyone has known about for years and is running out of steam. Think championing tech stocks in mid-1999 or pre-construction condo flipping last month in August 2005. Understand what I mean?

But just like the proverbial broken clock that is right twice a day, MONEY has published an excellent article in their October 2005 issue available on newsstands right now.

This article is called “A Tale of Two Yields” and is written by author Stephen Gandel who NAILS the wide disparity between the yield on the Standard & Poor 500-stock index, a reflection of U.S. economic growth,
and the Real Estate Investment Trust (”REIT”) markets, an indication of real estate valuations and cash flow projections on rental properties.

Put another way, this article makes two points I’ve been making in this newsletter for months extraordinarily clear.

Real estate prices are extremely overvalued, both historically and according to every business model you can think of, and that large cap stocks are undervalued relative to their historic yields and classic
valuation models.

The analysis in this article is right on target and the author deserves credit for not only getting his conclusions right but also for aligning a large number of facts to support them.

My only gripe is that the three large cap stocks listed in the article as REIT substitutes are lousy stocks. Bristol-Myers Squibb (ticker symbol BMY), Citigroup (C), and Verizon (VZ) in my opinion are all
dogs with fleas. BMY is too expensive relative to its peers and has many patent expiration issues. When interest rates are rising you don’t invest in companies like C that make most of their money on interest rate spreads. And VZ is being decimated by VOIP and cable companies offering telephone services. Running a telephone company is a terrible business model these days. It’s a commodity product with competitors everywhere and more arriving almost daily.

You can read this article in the paper version of the magazine, available everywhere and for free at libraries and doctor’s offices everywhere. Or you can read the online version if you are a MONEY subscriber. The article is not available online. If it was I’d give you a link. But it is worth reading for the analysis and not the
stock tips.

Just another indication that real estate prices are way too high and destined for a fall, or what athematicians would call a “regression to the mean historic averages.”

Robert J. Abalos, Esq.
www.investinginland.com
www.reinvestormagazine.com
robert@investinginland.com

You can sign up for Robert Abalos’ free ezine here…