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    Kathleen M. Howley

    Wary of stocks, some small investors turn to real estate

    As the housing market recovers from the worst bust since the Great Depression, neophyte investors are following the lead of private-equity firms, investing in properties they can pick up cheaply, rent, and sell when values rise enough. Home prices rose 4.6 percent from a year earlier in August, the biggest gain since the end of the real estate boom in 2006, a CoreLogic index shows.

    ‘‘The typical small-size mom-and-pop investor has two or three properties, looking at it as an income supplement with the possibility of being able to sell at some point,’’ said Lawrence Yun, chief economist of the National Association of Realtors.

    Investors are becoming more comfortable with real estate after the six-year housing slump. Many remain skeptical of stocks, even as the Standard & Poor’s 500 has more than doubled since falling to a 12-year low in March 2009.


    ‘‘I’d rather buy real estate than gamble on the stock market or get almost no return from putting my money in a bank,’’ said Barton Wallace, 60, a real estate investor and broker in Hingham who owns four rental properties. ‘‘I don’t have any problem getting tenants.’’

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    Wallace, who turned to real estate when she couldn’t get a full-time job, has one client who cashed out his home’s equity to buy his first foreclosed home. Other clients are tapping retirement accounts for the same purpose, transferring their cash into self-directed Individual Retirement Accounts that allow them to make their own investing decisions, with returns going back into the account.

    ‘‘Some people are making an indirect real estate play by investing in funds that buy foreclosures to rent, but most of the demand is from small-scale investors who live in the community,’’ Yun said. ‘‘It provides a decent rate of return for them because rents are rising and prices are still low.’’

    For individual investors, ‘‘the demand is there, but it’s a risky move if you are putting all your eggs in that one basket,’’ said Greg Willett, director of research for MPF.

    Even with rent gains, buyers of distressed properties to rent would need to get a discount of about 30 percent to get a yield of 8 percent, said Paul Diggle, a real estate economist for London-based Capital Economics. If investors are looking for 12 percent yields, they’d need to get a 50 percent discount, he said.


    The simplest way to calculate yield is to subtract expenses from annual rent and divide by the cost of the property. A $125,000 home will yield about 8 percent a year if a tenant pays $1,200 a month in rent and monthly carrying expenses are $400.

    That formula doesn’t account for the time a landlord may spend responding to disgruntled tenants and repairing burst water pipes or leaky roofs, Diggle said. Many homes in foreclosure are neglected. ‘‘Small-scale investors may actually run at a loss on rental housing if their sweat equity is accounted for,’’ Diggle said.

    Still, says Gary Hippensteel of Indianapolis, investors like him ‘‘want the safety of having a tangible asset.’’ If people can’t buy a house “they are going to have to rent.’’

    Kathleen M. Howley writes for Bloomberg News.