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Continued: Where to invest in an uncertain market? Consider drilling equipment, apartments

  • Article by: CHRISTINA REXRODE , AP Business Writer
  • Last update: June 16, 2013 - 3:15 PM

Mickey Segal, managing partner at Nigro Karlin Segal & Feldstein in Los Angeles

His idea: Apartments

To Segal, it's a great time to buy apartment-related investments, thanks to a combination of high demand and low supply.

He thinks that more people will have to rent apartments because it's tough to qualify for a home loan. And with higher mortgage rates all but inevitable as the Fed prepares to pull back on bond buying, some lower-income buyers may not be able to afford a home. Already, U.S. homeownership is at 65 percent, its lowest rate since 1995, according to the Census Bureau.

Another trend that could encourage renting is the tighter supply of homes. In some areas, investor groups are buying up houses for rental properties and hoping to sell them later for a profit. That limits the number of homes for sale. The National Association of Realtors, which advocates for home buying, says there aren't enough existing homes to keep up with demand.

There also aren't as many new apartment units coming on line. Builders broke ground on new apartments at an annualized rate of 234,000 in April, compared with 351,000 at the same period in 2005. And while construction was up this April compared with a year ago, it was still down 40 percent from the previous month.

Put it all together and you can expect higher rental prices. The median asking rent for a vacant apartment was $718 per month in the first quarter, according to the Census. That was roughly flat from the year before, but up 5 percent from two years ago.

"You have more people looking for a place to live who either lost their homes or couldn't afford their homes," Segal says. "And there's been no new real development happening for a few years."

Segal recommends investing in limited partnerships, which are offered through brokerage firms.

Anton Bayer, CEO of Up Capital Management in Granite Bay, Calif.

His idea: Corporate floating-rate and shorter-term bonds

Pay attention, because this one is a little complicated.

The Federal Reserve has been buying $85 billion worth of government bonds each month to try to make long-term loans cheaper and stimulate the economy. As long as the Fed is propping up demand for bonds, the Treasury doesn't have to worry too much about enticing buyers and can pay out low interest rates on them. If the Fed pulls back on its bond-buying spree — something that Chairman Ben Bernanke has said could happen soon — then the interest rate on bonds will go up.

That's bad for people who already hold the Treasury bonds. Here's why: Most Treasury bonds pay out a fixed rate. If you own a 10-year Treasury note that pays 2 percent interest, and rates go up to 3 percent, you're still going to get paid 2 percent. That means you're missing out on investing in a higher-paying bond. It also means that the underlying value of your bond is going to go down: No one wants to buy a bond with a 2 percent yield in a 3 percent yield market. You can get all your money back if you wait until the bond matures, but that will take 10 years.

Bayer recommends floating-rate corporate bonds, because the interest rates they pay change along with the Fed's interest rate. Be careful, though, because floating-rate bonds are often issued by riskier companies.

Bayer also recommends fixed-rate bonds with shorter durations. If you own a bond paying a fixed interest rate, and then interest rates rise, it's better to be able to get your money back in one year instead of 10. Keep in mind that the shorter-term Treasury bonds will pay much lower rates: A 10-year Treasury note is paying about 2.1 percent. A one-year Treasury note is paying 0.1 percent.

Bayer says that investors who were used to the higher interest rates of previous decades will have to retool their investing strategies.

"That's the biggest mistake that investors are making right now," Bayer says. "What worked for the past decade is not going to work now."

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