Mark Twain once said, “Buy land, they’re not making it anymore.”
With the stock market having just had one of its best years ever and bond yields still below historical averages, investors are once again thinking like Mr. Twain and looking to real estate.
The economic problem with such investments, however, is a lack of liquidity.
The liquidity of any market is measured by the ease at which participants can buy and sell. Higher liquidity in a market means prices are more accurate and volumes are higher.
Such markets contribute more to the overall growth of the economy. Just think of the ease of buying that Amazon has brought to the consumer products market and the lower prices we all enjoy because of it.
Unfortunately, it is not getting any easier to buy or sell real estate. The regulatory compliance costs of mortgages, property titles and insurance continues to rise.
Despite such hindrances, property values across the nation are rising. The S&P/Case-Shiller U.S. National Home Price Index was 6.2 percent higher year-over-year as of its most recent report. The Society of Industrial and Office Realtors’ Commercial Real Estate Index for the Mountain States is up 5.8 percent.
Local commercial real estate is also showing strength. The December 2017 Guide to Boise’s Commercial Real Estate Market from Thornton Oliver Keller reports lower vacancies in all three categories tracked — office, industrial and retail space.
So why not follow Mark Twain’s investing advice? Real estate investing isn’t easy. One year ago in this column I suggested most investors just “keep things simple” with stocks and bonds. It turns out you can do that even if you want to invest more in real estate.
The most liquid form of real estate investing is found in the stock market itself. A Real Estate Investment Trusts, or REIT, is a corporation that owns and manages commercial or residential properties, or both. Some REITs also develop properties or originate mortgage loans.
REITs have a special tax status that allows them to avoid corporate tax as long as nearly all income is distributed to investors. Therefore, REITs normally offer investors relatively high current income.
So simplicity continues to reign. Stock market investors buying REITs take advantage of land’s limited supply with less risk.
Peter Crabb is professor of finance and economics at Northwest Nazarene University in Nampa. firstname.lastname@example.org.