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Diversify in one investment-rich town

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Much of my work is involved in staying aware of new investment opportunities for my clients. I preach investment diversification and frequently, I touch on new types of investment opportunities.

Investing in New York City real estate has historically been impossible for the smaller investor. This investment has only been possible through either institutional investing or through millions of your own money. A REIT (Real Estate Investment Trust) can specialize in a specific type of property or a specific strategy of properties similar to a mutual fund portfolio of stocks.

But this type of specialized REIT should be in a portfolio with other types of REITs or other types of investments.

Recently, I had the good fortune to visit with many of the principals of different REITs that are investment opportunities for my clients. This gives me the opportunity to learn firsthand from many successful large scale investors and portfolio managers.

Having just completed a visit to evaluate a REIT opportunity specifically for the island of Manhattan, I decided to share my thoughts. Originally, I was skeptical because I did not see the diversification as I do in many other REITs that I share with my clients. Obviously, the more you learn about investments, the more comfortable you become. Learning and seeing first hand gives you the full perspective of the investment.

For many years, I have discouraged clients from investing in real estate in only one geographic area such as Florida. If you are going to invest in residential homes, for example, invest in multiple markets. The only exception to that I have found is investing in New York City.

There are several factors that go into this variance that justifies this approach.

To better understand the real estate history of NYC and the how the cycles play a big part of its uniqueness, you need to understand how NYC compares to other cities. NYC comprises about 400 million square feet of rentable space. Denver, Atlanta, Dallas, Philadelphia, San Francisco, Los Angeles, Boston and Chicago combined only total 360 million.

Because NYC is an island, there cannot be more office/retail space added. Since 1990, the supply has been about 400 million square feet. The only real change in the past two decades was the loss of the World Trade Centers.

The next step is to understand the cycles of supply and demand for NYC. We obviously have gone through a recession that has hurt real estate across the country. If you review the last two complete cycles since 1990 you will see that it is clear that NYC is on its way up again.

If you add typical real estate strategies of buying good quality properties from distressed sellers (someone that is having financial troubles and has to sell), buying them with vacancies so there is room for improvement, then holding it to liquidate before the cycle starts to peek, NYC is an attractive option.

Remember, when investing in real estate, don’t fall in love. This is the reason people lose on real estate; they feel the value will keep going up and don’t pay attention on when to get out.

The advantage of this type of REIT is that it has the potential to be a lucrative investment. It is managed by professionals with the experience of investing in NYC real estate and, for the last couple of cycles, a track record of knowing when to get out. This is a blueprint for potential success.

This strategy must be based on personal goals, circumstances and risk tolerance. If investors understand this basic investment advice, they will be in a better position to ride out recurring market volatility.

A plus to this type of REIT is that they would be looking for more capital appreciation so the dividend paid out on a monthly basis would not be taxed as dividends but instead would be deferred.

Information in this column is not intended to be specific advice for anyone. You should use the information to help you work with a professional regarding your specific financial objectives.

Capt. Mark A. Cline is a chartered senior financial planner. Comments on this column are welcome at +1-954-764-2929 or through www.clinefinancial.net.

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