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Forget The Bubble Buzz

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Financial planners are saying that both advisors and their boomer clients need to minimize the buzz over bubbles and rising building costs and heed one clear message: Real estate is a core part of a portfolio.

These planners say that investing in real estate investment trusts, REIT mutual funds or in real estate itself affords a boomer with capital appreciation, regular income or both.

For boomers, the buzz includes national attention to a possible real estate bubble and concerns over how rising construction costs may impact real estate development.

Sparked by the rising cost of materials, the construction industry may be curbing some commercial building. For instance, Prudential Real Estate Investors recently postponed development of a business park in Deerfield Beach, Fla., because of rising construction costs, Theresa Miller, a Prudential spokesperson confirms.

“The fundamental question is whether REITs and more broadly real estate is appropriate for boomers. The answer is ‘yes,’” says Kevin Gahagan, a certified financial planner, principal and senior advisor with Mosaic Financial Partners, San Francisco.

For most investors, he says, REITs and real estate mutual funds are the most efficient way to invest in real estate. Even using leverage, it takes a substantial sum of money to invest in real estate. Historically, a significant portion of return is from cash flow from rents and leases, and entry-level real estate usually does not have consistent streams of cash flow.

The problem, Gahagan explains, is that people entering the market bid up the price of entry-level properties while investors in office buildings and other commercial properties more accurately estimate the return needed to make a profit.

Gahagan says that in addition to having professionals who can assess needed returns, REITs or REIT mutual funds also offer both geographic and sector diversification. So, if factors such as an increase in building costs slow building in geographic regions where economic growth is not perceived to be as strong, diversification will outweigh that slowing, he explains.

He also notes that although costs of materials may have a short-term impact, it is important not to factor those increases too far out into the future.

His firm recommends both REITs and REIT mutual funds, but he says REITs are usually recommended if a client has $50,000 to $60,000 to invest in that investment type and has a portfolio of approximately $1 million. Otherwise, trading and transaction costs make mutual funds more cost effective, he notes.

He also says that since REITs have no favorable tax treatment, it is better to put them in a tax-deferred account because it is going to be treated as ordinary income upon distribution at any rate. And historically, two-thirds of the returns from REITs are from dividends, which are taxable and should be in a tax-deferred account, he added.

Joel Ticknor of Ticknor Financial, Reston, Va., says real estate in publicly traded REITs is a core asset class and belongs in every diversified portfolio. “You keep a core asset class because it is a core asset class.” It is a hybrid of stocks and bonds offering both appreciation and income, he notes.

He prefers passively managed REIT mutual funds because they curb costs. Also, if a boomer holds a REIT it is better in a tax-deferred account because a REIT’s dividends are otherwise taxable, he says.

REITs have performed well over the last several years, which has resulted in a reallocation of the asset class for many boomer clients, says Michael Williams, a certified financial planner who is founder and president of Altius Financial, Denver.

But Williams says that REITs should still continue to perform well because the economy is fairly strong and any perceived real estate bubble is more tied to residential real estate than to commercial real estate.

More importantly, he says, boomers will be living longer and experiencing longer retirements and will need investments like REITs that can generate income streams.

REITs offer a cash flow stream from dividends, something Williams says investors have wanted since 2000-2001 when the market turned down. They want something that pays real income, he adds.


Planners say real estate in one form or another should be a core asset for boomers, with real estate investment trusts offering a good option for many.


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