Having looked at several multifamily deals in secondary markets,and the taking prices and the projections, I am left to wonder whoother than a REIT can make good sense of buying some of theseproperties. While the assets are decent, they are often older, inneed of material renovation, and have some but limited rent upsidedue to the markets they are in and their age. In the current debtmarket, one can make good sense of a decent current return in theteens levered, but assuming a 5 year hold and the ten year risingto 4% or more likely 5% over the term of investment, it is hard tounderstand where the capital gain will be on an asset in asecondary city that is now maybe 30-45 years old. There is no realupside to the next buyer as the renovation will have beencompleted, the rents raised and wages and demand will not likelyhave increased a lot to justify material increases in rents forpretty ordinary suburban located apartments. In the meantimeoperating costs will have increased.

This appears to have resulted inREITs being able to swoop in and pay unrealistically high prices toget a nice asset that will yield a decent cash flow to the REIT. Anindividual investor has a very different outlook in most cases andis in for cash flow plus an upside and possibly the managementfees. For the passive investor in these assets it is fine if allthey seek is a higher yielding asset to provide a relatively safecash flow for a period of time, but there Is no real capitalgain.

When comparing investmentalternatives for thje passive investor, it depends on their goals,but one could reasonably argue that a securities portfolio ofmainly good quality equities traded on public markets is a betterinvestment over the next five years for someone who does not needto access the cash. It is a reasonable assumption that over thesame five year hold period the economy will eventually improve, andstocks will be higher an average over that period at the long termincrease of 7.5%-9%. In the interim there are dividends of onaverage for good stocks of 2% more or less. While there is far morerisk that the stock will gyrate in value in that period, comparedto the multifamily asset, it is also far more likely that theportfolio of stocks will generate a much better levered return withcapital gains over the same term and the investor will have dailyliquidity if needed.