Time is Now for Real Estate -- But Where?
Hello High Yield Investing Friend!!
I hope you are doing well!!
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I have a great report for you this morning – we see a big opportunity is real estate. Let’s begin!
First, the US is in so much debt that the government simply must inflate its way out – it cannot pay back the debt currently, but inflation can knock the absolute value of the debt down to manageable relative levels. There seems to be no alternative.
This sets up real estate nicely, as it has an excellent record of beating the S&P during moderate and high inflation times:
Not only that, but real estate rarely sells off enough to give us a good entry point – it is not as volatile as other stock sectors. This is one of those rare times, as measured by the VNQ ETF real estate is cheaper than five years ago, and off 28% from the top:
It does not get much better than that in this sector.
But there is good reason for the current beatdown, namely interest rates. It costs more twice as much to fund purchases now than it did just two years ago (as measured by mortgage rates):
As some borrowing costs jumped from 3% to over 7%, cap rates (rate of return from rents) did not jump as much:
We know that a lot of office buildings are famously underwater right now (meaning more is owed on them than they are worth, listen to Mr. Agree in the video below speak about balloon/bullet financing). And seeing as they have some of the highest cap rates, that bodes poorly for the other sectors (although office space has special work-from-home challenges).
Retail has earned it high cap rates by having strong headwinds like office space, as brick and mortar died over the last decade or so, dropping from 29% of total real estate all the way to 11%:
If investors could find any retail REITs that can navigate these waters well, they could enjoy terrific cap rates (because they are assuming the risk of retail) and great entry point.
Agree Realty (ADC) has proven their merit here with authority.
How? Let's listen to Joey Agree explain:
By understanding that the customer needs to come to you as part of fulfillment (8:40 - 11:33)
By understanding grocery’s new dynamics (17:14 - 22:29)
By understanding drug stores new (dead) dynamics (22:50 - 25:03)
By being laser focused and having no competition (25:34 - 28:16, 37:06 - 39:26)
ADC is large and steady enough to earn a credit rating from Moody’s, and that financial stability means it enjoys excellent borrowing terms: