How You Can Profit Like Warren Buffett Only Wishes He Could

In 2012, the Oracle of Omaha said he wished he could go huge in this market -- and it's one that you're probably already be invested in.

Jun 26, 2006; New York, NY, USA; CEO of Berkshire Hathaway Inc WARREN BUFFETT at a press conference where he announced his 31 bi
By David Goodboy

Among the broader bull market of 2013, one sector enjoyed a boom so substantial that it increased investors' holdings by $2.2 trillion. And I'd bet that most readers are already participating in this explosive trend.

I'm talking about the housing market -- but unbelievably, many financial pundits and self-proclaimed gurus are warning of the coming dangers in this market while overlooking the facts.

While it's easy to have your investment decisions swayed by a well-expressed opinion, the only way to drill down into financial reality is to tune out the noise and study the actual numbers. In this case, the numbers tell a far more bullish story than the fearmongers and perma-bears would have you believe.

According to a recent study by research firm CoreLogic, nearly 4 million U.S. homes shifted from negative equity to positive last year. The Federal Reserve has reported that homeowners' net equity holdings surged by $2.2 trillion between the third quarter of last year and the same period in 2012.

This tremendous increase in equity provides consumers confidence, which boosts spending across the board and lifts the entire economy. Additionally, greater access to more capital means more investment, further fueling the economic rebound.

More from StreetAuthority:

I am not concerned about another housing bubble because unlike during the financial crisis, banks and lending institutions have much tougher regulatory and internal underwriting oversight. It is much more difficult today to qualify for a loan than it was in 2007. This means smarter loans are being made, with strong odds of being repaid.

There's also the fact that housing inventories are finally declining. There is currently just over five months of inventory on the market, compared with a normal level of six and a half months of inventory.

Famously, Warren Buffett said in a 2012 CNBC interview, "I'd buy up a couple hundred thousand single-family homes if I could."

Now there are REITs following this suggestion that I think will make a fantastic investment over the next several years.

How Can I Profit From the Housing Trend?

Obviously, owning residential property is the most direct way to capture profits from rising equity levels. I wholeheartedly recommend buying rental properties as one way to benefit from this sea change, but this approach isn't suitable for many investors. Although the profits can be staggeringly high, it's far from an easy business and often requires substantial hands-on work.

Thankfully, there is another way to benefit from this explosive growth: purchasing REITs that invest in single-family homes. These specialized REITs purchase, rehabilitate and rent out single-family homes on a much larger scale than an individual investor could possibly accomplish. REITs are required by law to return at least 90% of taxable profits to investors, which makes them an ideal investment under the right economic situation.

Here's a closer look at two of these specialized REITs:

American Homes 4 Rent (NYSE: AMH)
This Maryland-based REIT owns more than 21,000 single-family homes across 22 states. The REIT is part of both the Russell 1000 and the Russell 3000 indices. It boasts a market cap of $3.1 billion and just over $77.4 million in revenue. However, the company just went public in July and has not yet been profitable enough to pay a dividend. Shares have pushed to a high near $17.

Silver Bay Realty Trust (NYSE: SBY)
Silver Bay specializes in single-family homes and has a market cap of just under $642 million, revenue of $35.7 million and $53.7 million in cash. Its portfolio consists of nearly 6,000 single-family homes with an occupancy rate of 95% on stabilized properties. During the third quarter, revenue increased by 35%, net operating income climbed 44% and net asset appreciation rose 3%. Just like American Homes 4 Rent, Silver Bay is not yet profitable, but it does pay a dividend yield of 0.2%. SBY's price pattern is similar to AMH's, with price stalling out in the $17 range after pushing higher.

Risks to Consider: Single-family REITs are a relatively new product on the market, so unexpected risks may exist. In addition, the expanding real estate market is tightly tied to the economic recovery. Should the recovery take a step backwards, real estate will be among the first sectors to suffer. Always use stop-loss orders and diversify when investing.

Action to Take: Both Silver Bay and American Homes 4 Rent are still in the investing stage, so there has not been enough time to earn profits. As the real estate market continues to improve, inventories drop, and banks tighten their lending standards, profits will likely increase for single-family REITs. I look at these as a longer-term investment and expect to see shares in the $26 range within 24 months. Combined with the expected dividend yields, both REITs will make solid investments.

Wait for a breakout close above $16.40 on Silver Bay and $16.80 on American Homes 4 Rent before entering to confirm the upward momentum has returned.

P.S.: My colleague Nathan Slaughter has been pounding the table for months, telling readers of his High-Yield Investing advisory about the enormous opportunity in real estate right now. To learn more about Nathan's absolute favorite picks in real estate, which help regular investors unlock an income stream previously reserved only for America's privileged elite, read his special report by clicking here.

David Goodboy does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

Increase your money and finance knowledge from home

Banking Services 101

Understand your bank's services, and how to get the most from them

View Course »

What is Inflation?

Why do prices go up?

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:

It is amazing how much the COnservaslime movement is made up of salestrash who never have produced a single thing in their pathetic, disgusting, slimy little excuses for lives but are quick to spout on and on and on and on about hard work. We need to throw out 80 percent of the salestrash and marketeering trash and make sure the remaining ones are compensated according to what they produce which would put them $2.00 below minimum wage.

February 18 2014 at 3:20 PM Report abuse rate up rate down Reply

AOL didn't like my post about the woman with 15 kids who thought the taxpayer should support all of them. I saw the video of her. It is relevant to the economy.

February 17 2014 at 9:59 PM Report abuse rate up rate down Reply

The working masses and those who cannot find work have been so thoroughly tricked by the corporate press that they applaud for their oppressors.

Buffet, Gates, the rest of the plutocrats have serfdom in mind for you. time to roll out the guillotines.

February 17 2014 at 7:26 PM Report abuse -3 rate up rate down Reply

Buffet said about poverty and inequaltiy that his 'class' was winning. How right. And now puff pices from corporate literature about how you can be 'Buffet'.

This is sock puppet corporate propganda. Can you even pay your rent or for food and medicine?

February 17 2014 at 7:22 PM Report abuse -3 rate up rate down Reply

I guess if you don't pay your fair share of taxes....because the 73,000 pages of tax code allows it.

February 17 2014 at 5:39 PM Report abuse +1 rate up rate down Reply

Homes are a place to live and should not be an "investment opportunity". Salestrash driving up the price and inflating housing costs to get rich while producing nothing are most of the reason our country is in the economic mess we have. People need to get back to working for their living, being compensated fairly for their work and we need to quit supporting the salestrash and so called "investor" class parasites who produce nothing of value. Housing inflation does not add to our economy.

February 17 2014 at 5:20 PM Report abuse -2 rate up rate down Reply
3 replies to hsenpfeffer's comment


February 17 2014 at 2:11 PM Report abuse +1 rate up rate down Reply
James L. Holland

How to pick the Best Stocks With Mr Holland

February 17 2014 at 12:21 PM Report abuse rate up rate down Reply

Warren Buffett is not some sort of an investment guru. He doesn't even know what a megabyte is.
Half of his Berkshire Hathaway portfolio is in cash and cash equivalents, not stocks. He didn't make it using stock picking genius, he made it selling insurance. A GEICO ad is playing somewhere on Earth every second. Did you know that less than 1% of all the people that buy life insurance ever collect on it ? And 3% on car insurance ? Buffett is using Berkshire Hathaway as a place to park his insurance billions.
But even Buffett is not the king in this, no the king of this is Met Life with over a trillion dollars in assets. It's so much they are having problems looking for places to invest it.

February 17 2014 at 7:33 AM Report abuse -1 rate up rate down Reply