Real Estate Investment: When Do You Buy And When Do You Sell?

Posted by Staff Reporter ( on Dec 10, 2015 06:42 PM EST
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S&P Index Reports Record Drop In U.S. Home Pricesmore big
GLENDALE, CA - NOVEMBER 27: A reduced price sign sits in front of a house November 27, 2007 in Glendale, California. U.S. home prices plummeted 4.5 percent in the third quarter from the year before. It is the biggest drop since the start of Standard & Poor?s nationwide housing index 20 years ago, the research group announced. Prices also fell 1.7 percent from the previous three-month period in the largest quarter-to-quarter decline in the index?s history. (Photo : Photo by David McNew/Getty Images)

Sam Zell knows more about real estate investing than anyone else and according to him, it is all about timing. Zell sold his real estate firm Equity Office to Blackstone Group for $39 billion during the peak of the market in February 2007. This was just months before real estate credit markets begin to plummet.

Timing is really important and it pays to know when to buy and when to sell. Zell did this not just once but twice! At the end of October, his Equity Residential real estate fund sold more than 23,000 apartment units to Starwood Capital for $5.4 billion. His company plans to see another 4,700 units sometime soon. Most of the proceeds will be returned to investors next year in the form of dividends, an article from Business Insider revealed.

Zell's technique is to cash out of non-core assets and rather than re-invest, most of the cash is given to investors.

So how does Zell know when to sell?

REITs (real estate investment trusts) are considered to be lucrative sectors after the 2008 credit crisis. REIT prices are up 286 percent from their March 2009 low, compared to 209 percent for the S&P 500 over that same period.

According to Real Capital Analytics data commercial property values reached an all-time high on record in August--up 14.5 percent and even surpassing the previous numbers.

High prices have led to record low cap rates (cap rates measure a property's yield by dividing the annual income by the property value). The average cap rate on all property types across the US hit 5.25 percent in September breaking the 5.65 percent low from 2007.

Higher interest rates have caused REIT investors to take a pause. Higher interest rates make dividend yields from REITs a far less reasonable option than other safer alternatives, such as Treasury bonds. It is also very costly to finance new acquisitions as well as  real estate developments.

CEO of Vornado Realty Trust, Steven Roth, said during an investor call in August, "The easy money has been made in this cycle... this is a time when the smart guys are starting to build cash." Perhaps it's time for investors to find out where the real money is and to get out of  real estate when the time is right.

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