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Investing: Real Estate, Yes...REITs, Not So Much


While owning real estate may be a good idea in today's low-interest rate environment, owning dividend-heavy REITs may not be.

The only things certain in life are death and taxes.
-- Benjamin Franklin

With interest rates still near record lows and credit beginning to show signs of easing again thanks to all kinds of monetary intervention, housing does appear to have bottomed.

There has been good economic data suggesting strong improvement, and buyers look to be slowly creeping back into the property space. There is an argument to be made that now could be a great time to buy into real estate, if anything as an inflation hedge. This would be particularly true if I'm right about 2012 looking like 2003 and 2009 in terms of a starting point for reflation.

As far as real estate investment trusts (REITs) go, well. that may be a different story. Take a look below at the price ratio of the iShares Real Estate ETF (IYR) relative to the S&P 500 (IVV). As a reminder, a rising price ratio means the numerator/IYR is outperforming (up more/down less) the denominator/IVV.

I've annotated the chart to show that the ratio has been unable to pass its prior resistance level, with the most recent relative performance quite weak. Much of this occurred as news crossed of a proposed dividend tax hike by the Obama administration, which would make income-oriented investments like REITs relatively unattractive from an after-tax perspective.

While unclear if the budget proposal and change to dividend taxes will go through, the reality is that money is repositioning on the possibility that it does. Practically speaking, this means the tax benefit of owning property and deducting interest outweighs the tax hit that could increase next year for dividend-paying stocks.

Besides, if I'm right about a big move for stocks in 2012 as I argued on CNBC, then you likely can get more bang for the buck from nondividend stocks to begin with.

Twitter: @pensionpartners
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No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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