"If you remember where yields were four or five years ago, you didn't have to go to real estate for a reasonable return," says Peter Boyle, principal and chief investment officer of Clifford Swan Investment Counsel in Pasadena, Calif. Like many other planners, Boyle is adding real estate to his clients' portfolios.
Most are using public REITs, mutual funds or, in some cases, mortgage-backed securities. But some are also investing directly via nonpublic REITs, limited partnerships or mortgage pools. Some advisors are also urging clients to buy properties outright. Even the structural problems of direct property ownership - illiquidity and management costs - can be outweighed by overall yields, compared with other investments. A strong rental market is providing steady "dividend" income.
"This is a very good time to be buying real estate," says Brian Parker, co-founder of EP Wealth Advisors in Torrance, Calif. "About 15% to 20% of our clients have done some sort of real estate transaction recently. In most cases, I think they have made good investment decisions."
Financial Planning spoke with planners across the country to gauge how their real estate investing strategies have changed - or not - in the past several years. We discovered a greater willingness to embrace real estate as an investment option among planners who historically had considered it outside their expertise.
THE DOWNSIDE
There are plenty of challenges to this strategy. Planners can take a hit when their clients choose to buy real estate directly. "It's hard to figure out how to get paid," Boyle points out. "We charge a percentage of assets under management and it's hard to get a percentage of zero." Even worse, many clients have ruined themselves in this recent real estate bust.
One client who inherited $2.5 million from her grandmother's estate invested it all into a single home near the top of the real estate bubble.
"I tried to explain to her that she would pay $200,000 in fees and commissions," says the woman's planner. "I was shocked that she wanted to do it."
The woman, the planner presumes, probably lost heavily in the dramatic slide of home values. He doesn't know for sure because, with none of her assets remaining for him to manage after the purchase, he lost her as a client before the bust.
Yesterday's trials and changing global markets have helped to lay fertile ground for real estate investors in the post-bust era. The allure of real estate's noncorrelated returns to the stock market have inspired some planners to look hard for unique opportunities.
INVESTING AND HELPING
Last year, John Bailey, founder and CEO of Spruce Private Investors in Stamford, Conn., took 15 clients and prospective clients on a trip to view real estate in Brazil. The group, which included heads of large families and a few foundations, surveyed several residential apartment developments in Sao Paolo and Rio de Janeiro that were valued at up to $100 million. Units in the properties, marketed to Brazil's emerging middle class, were expected to sell for as much as $100,000.
The group explored the local political and cultural landscape. They visited Vik Muniz, one of Brazil's most famous artists who sources materials from one of the world's largest landfills. Proceeds from his art sales are distributed to residents of the landfill who survive by combing through trash, looking for sellable recyclables.
"There were people in tears," Bailey says, referring to the trip attendees. "It put a face to the challenges of poverty that many people in Brazil are facing. We don't [travel] just to see good investments. We want people to have life experiences. We don't want them to think of their investments as black lines on a document. We did [the trip] because we wanted people to understand the variety of aspects of the culture, as well as the risk."
Bailey is betting that the Brazilian real estate investments will generate hefty returns while fueling social progress. As Brazil's leaders try to integrate the residents of the favelas, or slums, into the civic fabric, affordable housing will be a vital part of the solution, he says. "Many of our clients feel good that they are contributing to the build-out of the middle class in Brazil," Bailey says.
