Real Estate Investing: The Good, The Bad and The Crazy
As part of a long-term investment strategy, real estate can serve as a portfolio diversifier and inflation hedge. But if you make poor decisions, real estate can put you in a very deep financial hole that lasts for years.
Case in point: This past weekend, I found myself watching on Netflix (NSDQ: NFLX) a cheesy, low-budget action film starring Nicolas Cage and I wondered: How did the Oscar winner sink so low? And then I remembered that Cage went flat broke from making crazy real estate investments. Therein lies a cautionary tale for investors.
During the height of his career in the early 2000s, Cage was making as much as $40 million a year. He accumulated a vast real estate empire, including two apartments on a ritzy stretch of New York’s Fifth Avenue; three castles (one an ancient Bavarian castle in Germany); Dean Martin’s former home in Beverly Hills, Calif.; a townhouse in Bath, England; and two islands in the Bahamas.
Famous for his quirky roles in Leaving Las Vegas, Raising Arizona and National Treasure, Cage filed for bankruptcy in 2009. His magnificent homes, apartments and land either went into foreclosure or were sold for huge losses. What’s more, the IRS came after him for $6.3 million in back property taxes.
During the Great Financial Crisis of 2008-2009, Cage fell victim to a double whammy: a steep decline in home values and a cash flow crunch. He missed mortgage payments and let unpaid property taxes pile up.
At the age of 52, the former Hollywood “A-lister” is only now climbing back to financial solvency, largely by making as many movies as humanly possible. Between 2009 and today, Cage has appeared in about two dozen movies, most of them critically panned box office flops.
A saner way to invest in real estate…
Instead of getting overextended on mortgage payments, Cage would have been better off putting his multi-million dollar film salaries into real estate investment trusts (REITs), which are among the most reliable income generators you can find.
To be sure, REITs have been taking it on the chin lately as the Federal Reserve hikes interest rates. Amid today’s rising rate environment, two textbook reasons are compelling investors to shun REITs. First, loan costs will rise, making real estate acquisitions more costly. Second, the risk-reward ratio of REITs becomes less attractive in comparison to other income investments.
However, rates in 2017 are unlikely to rise very fast or far. You should look for REITs with high yields that dominate distinctive niches and as such, boast inherent strengths that will weather any rate hike and thrive in the year ahead.
That’s why the Income Portfolio of our flagship publication Personal Finance holds Realty Income (NYSE: O).
Realty Income is a REIT that operates over 4,300 properties owned under long-term lease agreements with regional and national retail chains and other commercial enterprises.
Realty Income should do well in 2017, even as rates rise. This REIT encompasses 234 commercial tenants, 79% of which are retailers. Realty Income is on a path to become an S&P Dividend Aristocrat by the beginning of 2020; it currently boasts a juicy dividend yield of 4.06%.
Since PF chief investment strategist Jim Pearce added Realty Income to the portfolio, it has generated a total return of more than 67.6%.
“An entirely new tech ecosystem…”
I received this email last week from a reader:
“As the poet said: ‘Of all sad words of tongue or pen, the saddest are these, It might have been.’ I don’t have a sad story YET, but since technology stock NVIDIA is now up well over 100% in my portfolio, I wish that someone would tell me when it’s time to leave the party.” — Sandra M.
The poet you cite is John Greenleaf Whittier. I can’t vouch for Whittier’s investing chops, but I can tell you that chip maker NVIDIA (NSDQ: NVDA) remains a compelling stock to own.
There are many plays on the explosion of virtual reality (VR), but one of the best is California-based NVIDIA, which produces high-quality gaming graphics processing units and graphic cards that are crucial for the operation of VR headsets. NVIDIA also offers processors for design professionals working in creative applications such as computer-aided design, video editing, and special effects.
Arthur C. Clarke, the late British futurist who wrote the novel 2001: A Space Odyssey, once observed that any sufficiently advanced technology is indistinguishable from magic. The analysts at our publication Breakthrough Tech Profits explain the near-magical capabilities of NVIDIA’s technology:
“VR represents an entirely new tech ecosystem. Using a VR headset, it’s an immersive experience for users providing ‘presence’ in a virtual world… There is huge market potential when it comes to supplying the semiconductors, infrastructure and equipment to support VR in both the consumer and business segments.
NVIDIA’s GeForce GTX processor offers a rich and highly immersive VR experience thanks to its fast performance. Importantly, NVIDIA’s graphics processors power the 360-degree video used in VR.”
As VR technology achieves new breakthroughs and its applications expand from games and entertainment to communication, education and telemedicine, NVIDIA’s entrenched position in VR puts it in the “sweet spot” for continued market dominance and capital appreciation.
Linda McDonough, chief investment strategist of Profit Catalyst Alert, also notes that NVIDIA’s technology plays a crucial role in “smart cars,” a space that she says presents enormous growth opportunities:
“Industry experts predict dollars spent on Smart Car technology will swell from current levels of $29 billion to $105 billion over the next five years. This represents a 29% compound growth rate, a rate well above most industrial markets.”
But you’re right, Sandra: NVIDIA’s stock has been on a tear, soaring 218.5% in 2016, and it’s now quite expensive. Hang onto the stock because it still has room for growth, but wait for pullbacks if you want to accumulate more shares.
Got any questions? Drop me a line: firstname.lastname@example.org — John Persinos
We’ve found the next NVIDIA…
Wall Street wants you to think that the only way you can take part in hyper-growth companies like NVIDIA is to wait for them to go public. However, Initial Public Offerings (IPOs) carry dangers for even the savviest of investors.
It can be difficult for individual investors to “get in” on a hot IPO because initial shares are doled out to mutual funds, hedge funds, pension funds, insurance companies, and high-net-worth insiders. By the time everyday investors get an opportunity to buy shares, they’re typically found on the secondary market and they’ve already been traded.
But now, thanks to the U.S. Government’s reversal of an 83-year-old law, regular Americans are free to invest in amazingly lucrative under-the-radar opportunities not known by the general public. And we’ve found three that are accepting new investors right now.