The Investment U e-Letter: Issue #431
Tuesday, April 26, 2005

Real Estate Investing Information… the Right Way, plus Facts and Tips on Real Estate Stocks
By Dr. Steve Sjuggerud, President, Investment U

My friend Dan Ferris writes what many consider to be the very best investment newsletter focused on “value” investing. Dan’s written Extreme Value for years now. Recently, he launched his second newsletter and it focuses on real estate investing.

Real estate investing information from Dan the Value Man?

This morning I gave Dan a call to find out the story here: How can a guy who likes to pay next to nothing for an investment possibly be interested buying in real estate?

Doesn’t Dan know that everyone’s investing in real estate now? And therefore, how can he possibly earn market-beating returns for his readers in the next few years in real estate?

I asked Dan a few questions to find out what his thoughts were and to seek out more information…

California Refugees, and the Residential Real Estate Investing Problem

“Dan, I just saw that home prices in the rural towns where you live north of California have just gone nuts in the last few years. Yet there aren’t any jobs near you for people to possibly be able to afford the current home prices. How do you explain that?”

“California refugees, Steve. They drive up with their Mercedes cars and their boats in tow…”
Then I asked him what he thought of buying coastal real estate.

“In general, it’s crazy… and the funniest part is that investors are buying it up. Investors have been buying raw land, too. My feeling is that these investors are going to end up disappointed with the real estate they’re investing in

“As an example, I bought my house in December 2002. A year ago, the building lots behind my house (just like my house) started selling for more than I paid for my house. I don’t know when it ends. But I wouldn’t be a buyer now.”

My next question: Why the heck are you starting a real estate newsletter now?

“Steve, you’re confusing residential homes with what I do. The name of my letter is Real Estate Shareholder. I’m generally buying companies that have a mountain of real estate holdings. And I’m very specific: I want to buy companies whose stocks sell at a dramatic discount to the actual value of the real estate they own.”

“For example, Tejon owns a massive amount of land outside of Los Angeles. It owns acres and acres along the main highway. When you look at the value of Tejon shares, the market is valuing Tejon at roughly $3,000 an acre. If you went to a real estate dealer, you’d never get that price. But by buying shares of Tejon, you do.”

Information That’s Hard To Come by: Finding Hidden Real Estate Bargains… In Value Stocks

Dan rattled off plenty of opportunities in stocks with a lot of real estate, where the total value of the stock is significantly less than the total value of the real estate the company owns. And in Dan’s mind, they’re screaming buys…

Dan has found great buying values in timber, apartments and hotel chains, for example. As Dan explained his thinking, I could see how it fit perfectly into his value-based investing approach, where he only wants to buy stuff that’s “safe and cheap.”

Significantly, it comes down to the entry price: You want to pay a price so cheap that, even if things don’t work out right, you can still make a good deal of money.

One Good Way of Investing in Real Estate Like Dan

Dan says the guys at the Third Avenue Real Estate Fund (symbol: TAREX) are the masters of this.

Dan gave me some great information, including an example where one stock TAREX invested in went bankrupt twice while they owned it (Frank’s Nursery)… and they still made money on it! That’s because they were shrewd in their real estate buying: They bought the company’s bonds, which led them to own the business when it went belly-up.

I can tell you about it… or I can show you in the chart below how much money people have made on the Third Avenue Real Estate Fund in the last five years, without much volatility:

More Investing Information: How to Keep Profiting From Buying Real Estate – Regardless of the Residential Markets

I think it’s going to be difficult to make money buying into real estate in the next few years. But again, I’m talking about investing in residential real estate. The guys who are speculating on lots behind Dan’s house may end up losing money. And the guys buying raw land in the swamps here in Florida on the hopes of finding a Greater Fool will probably be disappointed, too.

But if you can invest Dan’s way, where you’re often paying 50 cents on the dollar by investing in stocks with excellent real estate holdings, your downside risk should be much more limited.

I’m still skeptical. But Dan is a smart guy and he does good work. As we agreed in the call, whether you’re buying locally for yourself or you’re investing in a multi-million-dollar fund like Third Avenue, “it’s all about the entry price.”

Don’t forget that.

Good investing,

Steve

Today’s IU Cribsheet

• Check out a fund like Third Avenue Real Estate Fund (symbol: TAREX). You can learn more about it at http://www.thirdave.com. Check out its holdings, too it’s a good starting point for finding and investing in some stocks with real estate holdings that might potentially be under-priced.

• Check out my friend Dan Ferris’s new newsletter, Real Estate Shareholder. Dan is a stickler for value. Heck, his original newsletter is called Extreme Value. If there’s an “extreme value” in buying real estate somewhere, Dan will find it and give you his best information and advice.

P.S., If you’re interested in more information on real estate investing and buying, take a look at the following articles from the Investment U Archives:

• The Real Estate Bubble End Result: Is a Bust Headed this Way?
• Real Estate Investment Advice: How To Value Real Estate and Get Best Returns
• Real Estate Investing Reviews: Changing My Tune

Back to Archive