It isn’t a big secret that I love REITs and that most people have far too little of their money in this total return powerhouse sector.
Real Estate has been at the roots of many of the biggest fortunes in history.
REITs have much higher dividend payouts than most stocks and tend to do better than the stock market in bad markets.
In spite of all the reasons to own REITs, most people don’t own many of them in their portfolio.
A lot of folks that do own REITs prefer to use funds or ETFs because they think that real estate is complicated and tricky, requiring professional management to make the buy and sell decisions.
Wall Street has done a masterful job of selling that idea to the public and collected billions in fees for providing their desperately needed expertise to the public.
Real Estate Made Simple
At the local level, dealing with zoning rules, building requirements, tax codes, finding tenants, collecting rents, and all the other headaches can be tricky, but we don’t have to do that when we buy REITs.
All we need to do is make sure the people running our REITs know how to do all of those administrative details, and then sit back and collect our rent checks every quarter.
At the end of the day, there are really only two things you can do in real estate…
First, you can own it and rent out offices, hotels, apartments, single-family homes, or retail space.
Some specialty REITs rent it out as farmland, billboard space, or even cell phone towers and data centers, but it’s still owning property and renting it out.
Second, you can lend money to other people to build, or buy real estate to lend out.
I love this business because it tends to be steadier than outright ownership.
As long as you don’t screw up on the loan underwriting side of things, or lend too much money on a given property, the worst case is usually having to foreclose and take possession of a property and resell it to get your money back.
Both are great business, and I own REITs that do both.
I know that in today’s passive world, most people don’t want to think about which type to choose and then decide which company to buy, so today I’m going to give you a one-decision REIT that you can own forever.
This REIT is active in all aspects of the real estate industry, including some specialty areas that provide a potential kicker that will lead to higher returns over time
The REIT That’s Right for You
Starwood Capital Group is an investment firm based out of Miami Beach, and it’s run by one of the legends of the real estate industry, Barry Sternlicht.
Over the years, his firm has invested in 174,000 multifamily/condo units, 2,900 hotels, 80 million square feet of office properties, 54 million square feet of retail, and 54,000 lots of land in residential subdivisions.
They also currently manage over $60 billion in real estate around the world.
In addition to those accomplishments, he has also overseen two of the largest commercial real estate lending firms during his career, so he knows all aspects of the business.
Mr. Sternlicht is also the Chairman and CEO of Starwood Property Trust Inc. (NYSE:STWD), a subsidiary of Starwood Capital and our one-decision buy and forget Real Estate Investment Trust for today.
Starwood Property makes loans for both commercial and residential real estate, owns properties, buys and sells distressed properties and invests in real estate debt, both performing and distressed.
The company also leans heavily on its owner’s infrastructure expertise to lend for oil and gas, renewable, and thermal energy projects, as well as more general infrastructure projects.
They also own real estate outright.
They have apartments and office buildings in Dublin, Ireland.
Starwood has 59 affordable living developments with over 15,000 units in Central and southern Florida.
They own 34 medical office buildings totaling 1.9 million square feet. These properties are primarily affiliated with leading hospitals or located on or adjacent to major hospital campuses through the United States.
Topping it all off, they own 20 retail and industrial properties totaling 5.3 million square feet around the United States.
Believing in Their Work
There is a lot of skin in the game at Starwood.
All of the top executives and board members own stock and cumulatively have over 8.8 million shares of Starwood Property Trust.
For them to do well, they have to do well for us along the way. Everybody’s interests are aligned.
Perhaps because of that, Starwood is ready for a downturn if one happens anytime soon.
They have 6 billion pro forma undrawn credit facilities and $3.4 billion of unencumbered assets.
They have $334 million of cash on hand as of the end of June, and $181 million of short-term money market investments.
Starwood Property Trust should give you exposure to all aspects of the Real Estate industry.
You will own properties and also be one of the largest commercial real estate lenders in the country.
Their current dividend yield is 7.96%, and with their 64% loan-to-value and 95% floating rate loans, Starwood is in good shape no matter what the economy might throw at them in the future.
Looking at the numbers, I think this REIT and its hands-on approach will put a lot more money in your pocket than owning an unmanaged, passive REIT ETF.
Impacts of Passive Investment
The name suggests differently, but passive investing has a very active impact on the market and stock valuations. When a company is added or removed to an index, or a new fund is launched, those changes can ripple out into the market and have significant effects on your portfolio.
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