Andrew Allentuck

Saturday, April 5, 2003

The Smart Money Guide to Real Estate Investing
by Gerri Willis
212 pages
ISBN 0-471-22399-9

Gerri Willis, a senior writer for Smart Money Magazine, a U.S. publication, has assembled a catalogue of good reasons to buy real estate. The foundation for long term real estate investing is the 8 per cent income that it has provided. She adds discussions of how to buy and where to buy, financing, researching properties and more. Her work is lucid, her instructions brief and intelligent. With all that said, the best case she can make is for real estate as a long term, fairly secure investment. That's not bad in hard times, but she can't turn apartments and houses into silk purses. In the world of finance, they remain pigs’ ears.

The fact is that the long term returns on investing in land and buildings are lousy. For the last 15 years, real estate mutual funds in Canada have produced a return of just 5.0 per cent, which is much less than the 9.1 per cent return of Canadian dividend funds. But in two years of the present bear market, real estate funds have produced a 3.8 per cent average annual compounded return, which isn't bad compared to the 0.29 per cent gain of those dividend funds on the same basis. In other words, real estate dances to a different rhythm than financial assets and can be a hedge in hard times. Case made? Not quite.

Unlike government bonds, which only expose the investor to interest rate risk, real estate has risks just like equities, though with different name tags. There is adverse neighbourhood change. Speculators face the risk that interest rates can rise and rip apart a buy/fix/flip strategy. The can be zoning issues, liability issues, bad tenants who don't pay on time and more. Real Estate Investment Trusts take some of the risk out since they are professionally managed and tend to invest in properties as varied as hotels, shopping centres and office buildings.

Given all the perils in real estate investing, is it worth the risk? Ms. Willis says it is and, with her intelligent discussion of methods of dealing with real estate contractors, real estate sales people and more, the would-be real estate investor should be well prepared to take a first step into the field. For the money, this is a lot of good advice.