Investment Alternatives to Multi-Family Real-Estate

[Darr]

Please feel free to suggest Investment Alternatives to Multi-Family
Real-Estate that would provide the same low risk and inflation
protection. Is there anything out there that's low volatility/low risk
and yields a "Real Return" above inflation greater than 1%?

 

[bizaro86]

You could buy real return bonds issued by the Government of Canada. They pay a coupon (interest) based on their face value, but the face value is adjusted by inflation. That means that every year there is inflation the interest paid goes up. Also, at maturity the higher face value is paid back.



They currently yield less than your 1% requirement, but would do considerably better than that in an inflationary environment. If that's your concern, they could be an option. For smaller amounts, there is an exchange traded fund that holds Canadian real return bonds, it's traded on the Toronto Stock Exchange under the symbol XRB.



Regards,



Michael

 

[Thomas Beyer]

Indeed, multi-family has the lowest risk today, and that is why those assets sell for sub 5% CAP rates in large cities and why banks lend at 2.5%.



Real estate has many other asset classes such as:

• office buildings
• industrial warehouses
• storage facilities
• retail shopping centers / strip malls
• student housing
• marinas
• trailer parks
  townhouses
  acreages
  condos
  single family houses - with or without basement suites
  hotels
  furnished suites

All of them are good asset classes to own in the right locations, if you buy them right and manage them well, all with their own risk and upside/downside.



You can also buy mortgages or into a mortgage pool called a MIC. Some do second or third mortgages or do construction mortgages with fairly high risk. If you like low risk and are not willing to take a loss, first mortgages yielding about 3-4% might be for you. Some companies offer that.



In addition to real estate there are real return bonds, ETFs and stocks (or ETFs) with dividends.



Personally I also do covered calls and out of the money spreads that have a fairly low risk and decent return, but of course are susceptible to stock market swings. However, selling options allows you to capture the time premium in both PUTs and CALLs. For example, Facebook (FB) has dropped from an IPO price of $38 to now around $17. Several hundred million shares will come unlocked in November. It is fair to assume the stock will drop below $15, possibly even into single digits. You can buy a $20 call and sell a $15 call and make money even if the stock stays flat.



What specific options within these various alternatives in the investment world appeal to you ?

 

[Darr]

Thanks Thomas- I really appreciate your input on possible solutions but, I`m really not comfortable with options and risk.



Especially now since the implied volatility of both call legs are less than the stocks historical volatility making the options cheap. The $2.45 premium received for selling the spread may not be adequate credit for the risk embedded in that bear-call vertical you`re describing. Moreover, given the record low volumes out there, you`re basically alone against the market maker with no one else on top. There`s no price-time algorithms in the rules protecting you against them trading through the bid-ask spread especially if you need to exit your position. If Amazon is even suspected in putting an offer bid for FB, your short gamma position may squeeze you out very fast.

Are there any CPI + indexed mortgages out there?

 

[bizaro86]

Based on that reply, it seems like you might be an excellent person to ask the following question that has been bothering me for months. I'd like to hedge against large move down in oil prices or up in interest rates. Any creative ideas?

 

[Thomas Beyer]

[quote user=bizaro86]I'd like to hedge against large move down in oil prices... Any creative ideas?
Buy put options, sell call options or call spreads. Or buy the HOD ETF that bets on falling oil stocks. Or stay in cash. Noting ventured, nothing lost.



Boats are safe in harbour, but that is not what they are built for.

 

[Darr]

Hi Biz, although you`re hedge would be on the right side of politics, all that money printing IMHO will find its way into oil through decaying currencies in the long term. I share your views but Caveat Emptor: Oil is the most manipulated and politically sensitive product out there. Moreover, it`s out of my comfort zone.


The real answer all depends on your time horizon. Consequently, if it`s just for the short term as a hedge, you could use the same strategy Thomas was describing as a buy-write combination. Long oil and either credit spread the calls or debit spread the puts on whatever underlying you're using because you want to stay away from basis risk. Pay attention to implied vol. Same strategy applies for interest rate products. As previously mentioned, the markets are thin and it may be preferable to simply lighten up on your position.


BTW, I`m retired and looking for low risk retail alternatives that offer inflationary protection.


Mutual thanks for the suggestions.

 

[Thomas Beyer]

[quote user=Darr]I`m really not comfortable with options and risk.
Options can be used to reduce risk !



Any investment or life decision has risk. Even sitting in your chair and reading this post has risk: the house might collapse, the chair you sit on might give, there may be an earthquake or the screen might shatter. The only question is: how likely is this risk, and what do I do about it !



Here is what I know: January 2013 or Jan 2014 is later than today, September 2012. I also know that people need stuff: food, oil, gas, pipelines, PCs, shoes, database software, housing, commercial office space, mortgages ... I can make money with that knowledge. What I do not know is what real estate or Facebook or Google or Encana trades for in January 2013 or Jan 2014. However I do know that some companies are well managed and will be around forever. I can make money in a flat or even slightly declining market with covered calls, on quality stocks or ETFs such as: ORCL, IBM, MSFT, ECA, POT, SLV etc.



So, for example, buy 1000 shares of Encana today for $21.50 each or $21,500 and sell 10 calls for Jan 2013 at $2.50 each or $2500. Net investment: $19,000. You will not lose if Encana stays above $19. You will make $1000 on $19,000 invested in 4 months or 4% if it stays above $20. Can you lose money: yes. Is this likely: no. Or sell the Jan 2014 $17 call for $5.60 to be even more conservative: You now have net cash invested of about $16,000. Make $1,000 or 6% in 16 months if Encana stays above $17.



I make more money reliably in apartment buildings and that why 85%+ of my networth is in it. But I use this (and the related naked put or call or put spread on quality stocks) too on my spare cash as this is more liquid.



Disclaimer: this is an opinion. This is not advice. You can lose all your money in most investments. I am not licensed to give (financial or real estate) advice.

 

[Darr]

Hi Thomas, I`m just really searching for low risk alternatives which for me, does not include options, margin and un-manageable counter-party risk. Notwithstanding, I do thank you and appreciate your insight.



Your comment: `Boats are safe in harbour, but that is not what they are built for` reminds me of another.

`Only when the tide rolls out do you see who`s swimming naked`

 

[bizaro86]

[quote user=ThomasBeyer][quote user=bizaro86]I'd like to hedge against large move down in oil prices... Any creative ideas?
Buy put options, sell call options or call spreads. Or buy the HOD ETF that bets on falling oil stocks. Or stay in cash. Noting ventured, nothing lost.



Boats are safe in harbour, but that is not what they are built for.




I've considered all of those, but I'm looking for something highly leveraged. Maybe very out of the money put options. Those ETFs are vehicles of wealth destruction even if you're right.



My primary thesis is that oil will stay high, but I work in the oil patch and have a significant amount of RE in Calgary, so low oil/high interest rates would be bad for me. Basically I want insurance.

 

[bizaro86]

[quote user=Darr] Hi Biz, although you`re hedge would be on the right side of politics, all that money printing IMHO will find its way into oil through decaying currencies in the long term. I share your views but Caveat Emptor: Oil is the most manipulated and politically sensitive product out there. Moreover, it`s out of my comfort zone.

The real answer all depends on your time horizon. Consequently, if it`s just for the short term as a hedge, you could use the same strategy Thomas was describing as a buy-write combination. Long oil and either credit spread the calls or debit spread the puts on whatever underlying you're using because you want to stay away from basis risk. Pay attention to implied vol. Same strategy applies for interest rate products. As previously mentioned, the markets are thin and it may be preferable to simply lighten up on your position


I've been writing spreads on senior producers, but I'm looking for something very long term, and the markets aren't liquid more than 6 months out. Ideally I'd like 5 year far out of the money puts on the commodity and just call it a day, but options on futures are a bit outside my comfort zone.



[quote user=Darr]


BTW, I`m retired and looking for low risk retail alternatives that offer inflationary protection.


Maybe look into Select Income Reit, traded on the NYSE as SIR. It IPOd out of another REIT that felt it wasn't getting credit for the high quality of these assets. It's a few triple net leases, but most of the portfolio is a Hawaiian land lease portfolio. So they own land but not buildings, and lease the land for long terms with regular inflationary resets. Because their tenants put huge capital improvements on the land, they have no negotiating power on resets. It's a pretty good inflation hedge, although it's run up a bit in the last few months. Trading at 24.75 right now gives it a 6.4% yield.



Regards,



Michael

 

[Darr]

Hi Biz, Highly leveraged? How about a calendar spread on CL (WTI) or Coil (Brent)?

Short the front month and go long on the back month should provide the insurance hedge to compliment your long oil. This may solve your leverage requirements but not your time horizon. The advantage is that you're not paying for the put's theta. An extra bonus for downside protection right now is that CL is in backwardation.



BTW, Thanks for the plugs...I'll look into it.

 

[bizaro86]

[quote user=Darr]

Hi Biz, Highly leveraged? How about a calendar spread on CL or Coil?

Short the front month and go long on the back month. This may solve your leverage requirements but not your time horizon.

Thanks for the plugs...I'll look into it.


Thanks, I'm going to model that out and see if it'll work. I think if I rolled it over every month it might, as a big move over the long run must have short run moves also.



In terms of conservative inflation hedged investments, you might consider some of the rate reset preferreds issued during the financial crisis. You'd definitely want to read the prospectus on them, because some of them are callable at reset, which is a huge disadvantage. Something like CWB-A, which I believe is non-callable and resets every 5 years to 500 bps above 5-year Canadas. It's currently trading at a premium to face value of $27, current yield of 6.6%. It's also a non-cumulative preferred (so it can count as tier 1 capital for the bank).



I'm assuming rates would go up in an inflationary environment, which seems likely.



Regards,



Michael

 

[Darr]

Hey thanks. I`ll look into that. I would prefer non-callable issues also. Neg-convexity can bite you in the you know where.



Normally, rates should go up when inflation is in the wind but nothing is normal anymore. The central banks will stop at nothing to camouflage the decay in our currencies purchasing power and will resort to un-sterilized purchases and tier 1 asset swaps for delinquent cdo`s and mbs`s. This will keep interest rates low and capitalize the banks, but only for awhile. The practice is very dangerous and extremely inflationary.

 

[bizaro86]

[quote user=Darr] Hey thanks. I`ll look into that. I would prefer non-callable issues also. Neg-convexity can bite you in the you know where.



Normally, rates should go up when inflation is in the wind but nothing is normal anymore. The central banks will stop at nothing to camouflage the decay in our currencies purchasing power and will resort to un-sterilized purchases and tier 1 asset swaps for delinquent cdo`s and mbs`s.





You're welcome. Although I've now seen a comment on another forum suggesting those prefs may be callable in a couple of years, which drastically changes their implied yield. Also, if you're going to buy rate reset prefs, be careful of a potential regulatory redemption on some of them as well. OSFI is enforcing the Basel rules in some odd ways, so it bears looking into. I think the life insurance issues may be "safer" from a regulatory incursion of that nature, but it'd be worth it to do some background research before purchasing.



Regards,



Michael

 

[Darr]

I must say this has been an unexpected yet pleasant chain of discussion. I came here to learn about low risk/yield retail products only to be drafted into a derivatives strategy conversation. Here`s where I stand. I have owned a multi-family building for many years and was thinking about selling it because I live in another city. It's been upgraded from top to bottom and still provides me an ROE of about 2.85% which is great. The problem is that I have yet to find any investment remotely close to the real return it provides in the same risk space. I could buy another building closer to home but would like to keep that option in my back pocket. Any further investment ideas about alternative products are appreciated.

 

[invst4profit]

MHPs



Own the dirt rent the land. They are everywhere but seldom noticed except by other park owners.

Cap rates of 10, 15, 20 easily obtained and can be managed remotely with a property manager living on site.



http://www.mobilehomeuniversity.com/forum/list.php?1list.php



I purchased mine in Ontario in 08 for $380,000 + closing, 100% leveraged having positive cash flow, monthly rent of $5300/month and now at $6700/month.

The best deals are in the US keeping in mind conditions vary between states.

 

[Darr]

Totally out of the box but I like it...especially the US bit. I'll look into it. Thanks

 

[Darr]

Are there any CPI + indexed mortgages out there?

 

[Thomas Beyer]

ROE of 2.8% before tax means ROE after taxes paid on gain will be higher .. Around 5%. Plus rental and value upside. Likely then double digit. What is wrong with that / what is better with even lower risk ? Not much !