I love making unreasonably high returns on my investments.
And for those who have known me for a while, it should come as no surprise that I love real estate investing for that exact reason.
I have consistently made money in real estate securities for my entire career. I have now seen several long-term cycles play out in both commercial and residential real estate and every possible range of pricing extremes.
There have been times when prices were so ridiculously high that you felt compelled to sell, as well as times when property was so cheap you had to seriously consider robbing a bank to get more capital to invest in real estate.
I have seen falling rates, I have seen rising rates, I have witnessed inflations, and I have seen deflation. Through it all, real estate purchased correctly has been an excellent investment for long-term, patiently aggressive investors.
Now, let me step back for a second and admit that I've made money without ever purchasing an actual building, land tract, or condo...
How I Make Reliable Money in the Real Estate Market
I've always used publicly traded real estate securities, like real estate investment trusts (REITs), public real estate services companies, and public partnerships to buy my investment real estate.
Through these vehicles I have owned office buildings, shopping malls, apartments, single-family rental homes, cell phone towers, data centers, medical office buildings, hospitals, and just about every other type of property you can imagine. And I did that all without ever talking to a real estate broker or lawyer.
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I can buy or sell my real estate pretty much any business day with very little time needed to find a buyer or seller. I get all of the benefits of real estate ownership with very little of the hassles often associated with owning properties.
Finding reliable tenants? Not my problem.
Navigating the local government's permit office? Someone else handles that.
Hiring a contractor for maintenance and upgrades? I'm having a glass of wine instead.
Today's markets are in pretty good shape, and valuations are pretty reasonable in spite of the long tally since the credit crisis. We started from so low a level that we are only just now starting to see some of the hottest markets get on the high side of pricey.
Rents and occupancy rates are high and show no signs of weakening, and it's a pretty good time to be a real estate owner and lender.
Looking at publicly traded real estate securities, it is not the buying bonanza it was a few years ago, but there are still bargains to be found that offer the potential for unreasonably high returns.
And I've zoned in on two targets that are absolute steals right now.
In fact, both are currently boasting a perfect Money Morning Stock VQScore™, making them some of the best buying opportunities you'll find...
Make Unreasonably High Returns with the Best REITs to Buy
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One play I'm zeroing in on is iStar Financial Inc. (NYSE: STAR), a collection of real estate businesses.
It has a core lending business where it tailors loan packages secured by commercial real estate to sophisticated borrowers. It also owns a portfolio of net lease investments (properties where the tenants pay taxes, maintenance, and insurance, making the rents pretty much pure profits).
Plus, STAR owns 37% of a real estate investment trust it spun off: Safety, Income and Growth (SAFE). SAFE is the only REIT that invests in a portfolio of ground leases as a source of income and potential appreciation. It's pretty exciting in its own right, but we'll save that discussion for another day.
iStar also has a collection of assets and projects it is working to sell or otherwise monetize over the next few years. It has sold over $600 million of these legacy assets in the past year and plans to sell another $1 billion over the next couple of years. It also did a massive rework of its balance sheets, which extended maturities and lowered the costs of about $2 billion in debt.
The cash from these sales will be plowed back into its very lucrative real estate lending and net lease portfolios.
You may remember that I talked about the comments from KKR earlier this year that said that right now simplicity was overvalued and complexity was cheap. That's iStar in a nutshell. It is complex, and it is cheap.
When I add everything up, the REIT shares are trading for about 25% less than the value of the assets they own. That discount will get bigger as legacy assets are sold and redeployed over the next two years.
We should also see a pop in value when it reinstates its dividend payment. Right now, it is using net operating losses to eliminate any taxable profit and is not obligated to make a payout. That will change as conditions improve and asset sale profits are redeployed in more profitable activities.
Insiders have a vested interest in unlocking those values and driving the share price higher. Directors and officers of iStar are required to own stock in the company, and collectively they own more than $30 million worth of the REIT. For them to grow their wealth, they have to grow ours.
I see the same combination of complexity and skin in the game-creating opportunity at Ellington Financial LLC (NYSE: EFC).
Ellington is a REIT investing in debt securities and leveraged loans. In truth, it reminds me more of a credit hedge fund than a REIT, but management have done a fantastic job of managing their real estate business. The fact that insiders own almost $50 million of shares and have been buying more in recent months tends to keep them very focused on long-term total returns.
Co-Chief Investment Officer Mark Ira Tecotzky talked about Ellington's approach to the markets on the most recent conference call. It's worth quoting at length...
"Throughout its history, EFC has always tried to position itself to deliver investors what we call a quality return. That means an investment return that doesn't rely on crossing our fingers and hoping that interest rates stay low and the yield curve stays steep. A quality return doesn't rely on the greater fool theory that credit spreads will always tighten because we will always be able to find somebody willing to pay just a little more than ourselves."
Ellington is a little more complicated than your usual REIT, and as a result, the shares trade for about 80% less than the asset value of the company. They are also a higher-yielding REIT, with a dividend yield of over 10%, so you are well paid to wait for the full value of the assets to be reflected in the share price.
Plus, Ellington also boasts a perfect VQScore.
Combining real estate, a little complexity, and lots of skin in the game can lead to unreasonably high returns for patient, aggressive investors who understand the idea of buying assets for less than they are worth and holding on tight.
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Mistakes on the part of Social Security Administration employees have led to SEVERELY underpaid benefits for tens of thousands of Americans.
And though the SSA has admitted their wrongdoing, I'm willing to bet they won't be tracking you down to hand you your money back.
If you're eligible, and you take action now, you could receive a lump-sum of the money owed to you within five days.
There's $23,441 at stake - don't leave that on the table.
About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.