The market for high-end mansions seems to be reheating in Connecticut with two, 50-acre plus estates selling in April, one setting the all-time record for a residential purchase.
The Copper Beech Farm in Greenwich sold for $120 million, thought to be the highest price ever paid for a residential property in the United States, while the 52-acre, French-style Le Beau Chateau estate in New Canaan sold for $14.3 million.
Although both had similar land holdings the wide disparity in prices shows that the adage, “location, location, location” truly does matter. Le Beau Chateau listed 12,800 square feet of living space in the main quarters, while Copper Beech boasts a mansion plus two private islands and a mile of shoreline on Long Island Sound.
In truth, most people searching for an alternative investment probably won’t be in the market for a 52-acre property — on the water or otherwise. But the sale of these two mansions is a reminder that despite the downturn of the past several years, over the long haul, carefully selected real estate can be a good investment.
With the stock market in a state of flux and the international scene in an uproar, it is understandable that people are looking to invest in market segments that have the potential to grow and at the same time are outside of the recent “see-saw” equity market. That is why this may be a good time to look into real estate investment trusts (REITs).
Congress created REITs in 1960 to give people the opportunity to invest in income-producing real estate in a way that is somewhat similar to investing in stocks and bonds through mutual funds. Individual investors do not actually buy the properties themselves; they purchase shares in the REIT. REITs typically buy or invest in groups of properties, generating income through rent collections, or they may invest in mortgages or mortgage securities tied to properties.
And you don’t have to be wealthy to invest. Investors of average means may be able to take advantage of large-scale property portfolios through REIT purchases, earning a share of the income that may be produced through real estate investment. An individual REIT may focus on commercial properties including shopping malls or it may focus on apartment buildings, or perhaps some combination of both.
Because REITs trade like stocks, you can get into and out of them with relative ease, unlike limited real estate partnerships or other forms of real estate ownership.
As with the multitude of equity mutual funds, there are numerous REITs. Careful research is in order before selecting the REIT best for a particular portfolio. They are not without risk, certainly, but the degree of risk may vary from one to the next.
Analysts are saying that commercial real estate fundamentals are entering the cyclical sweet spot. As a result, investors looking for long-term cash flow-oriented investments with longer-term inflation protection properties should consider REITs focused on commercial real estate.
Slightly rising interest rates explain most of the comparatively poor REIT performance since May 2013. Nevertheless, at current levels, analysts suggest that REITs are fairly valued and offer select opportunities with industrial and commercial segments tending to outperform at this stage of our economic recovery.
Investing in more than one REIT, and choosing different real estate sectors, can help reduce risk, as can ensuring that the REITs in your portfolio are in wholly different geographic locations.
Another factor highlighting real estate as an investment worthy of consideration is that neither of the just-sold signature estates were used as a main residence by the owners, meaning they were investments, of sorts.
Some financial advisors suggest that for most investors, REITs should occupy no more than 10 percent of a typical fixed-income portfolio.
Foreign REITs may also be considered to add another layer of diversity to your overall strategy. Investing in foreign REITs necessitates the decision between investing directly, or buying the REITs on a foreign exchange.
REIT investing risks are similar to those associated with direct investments in real estate: property value fluctuations, lack of liquidity, limited diversification, and sensitivity to economic factors such as interest rate charges and market recessions.
Valerie B. Dugan is a senior vice president and financial advisor in the Hartford office of Morgan Stanley Wealth Management.
