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The Most Direct Housing Play in the Stock Market

By Dr. Steve Sjuggerud
Monday, December 10, 2012

The best investment you can make right now is to own a portfolio of homes... bought at foreclosure prices... that are currently rented.
Two Harbors (NYSE: TWO) – one of my True Wealth newsletter recommendations – has quietly done just that...
Over the last couple years, TWO has built up a portfolio of more than 2,200 homes... in the foreclosure capitals of America. Top cities for Two Harbors include Phoenix, Tampa, Atlanta, Las Vegas, and Charlotte.
As I write, Two Harbors is in the process of spinning off its portfolio of single-family homes. And you should buy before it does... 
Two Harbors will spin off its housing portfolio into a stock called Silver Bay Realty Trust (NYSE: SBY).
Silver Bay is not publicly traded yet... but it will soon. By buying shares of Two Harbors today – before the spinoff – chances are good you will end up getting Silver Bay shares, too. Chances are good Two Harbors will pay out shares of Silver Bay in a "special dividend" to Two Harbors shareholders.  
This will be significant – somewhere between 8% and 10% of the value of Two Harbors.
The best part is, you're getting a great deal when you buy Two Harbors today...
Two Harbors currently trades at around book value – which is roughly liquidation value of the company. So by buying today, you're buying Two Harbors cheap.
Also, Two Harbors pays a big 12% dividend. And it is run by some of the smartest income investors in America.
I think it was brilliant of Two Harbors to start the Silver Bay Realty Trust to take advantage of depressed prices in bombed-out real estate markets. It built a portfolio of rental properties in some of America's best cities, at prices we'll likely never see again.
Even better, you can buy into this portfolio at cost (or darn close to it) by buying shares of Two Harbors today and getting the (likely) special dividend of Silver Bay shares.
Silver Bay intends to pay dividends to you based on the rent it receives (after expenses). It will likely be classified as a REIT, so Silver Bay will not pay taxes on the rent it earns – it can pass it all on to you.
I don't expect the dividend will be large to start, as Silver Bay is starting with no leverage... and after its IPO, it will have a couple hundred million in cash to spend on buying more houses.
While the dividend won't be massive, I do expect it will beat just about anything else you can do with your money... like buying Treasury bonds or putting your money in the bank.
Even better, your money is invested in houses – which are cheap now, are in cities with great appreciation potential, and which will increase in value if inflation ever shows its head.
It appears that Silver Bay's IPO will be at around book value – which to me is cheap... It deserves to trade at a premium to book value, as there is no way you could put this portfolio of properties together today.
I like Two Harbors... I think the investment managers at Two Harbors do a fantastic job. And I love the fact that Two Harbors has bought thousands of homes, has rented them, and is listing them on the stock market.
Check out shares of Silver Bay once they start trading.
Better yet, own Silver Bay now, by owning Two Harbors. If you do that, chances are good you will get a "special dividend" of Silver Bay shares soon from Two Harbors.
Silver Bay will be the first pure play on my favorite idea now – single-family homes in America. Keep an eye out for it... or just buy TWO today and you'll own some of it already.
Good investing, 
P.S. If you want to see the Offering Document for Silver Bay, break out your reading glasses with the highest magnification and start here.

Further Reading:

Steve calls mortgage REITs like Two Harbors "virtual banks" because, like banks, they borrow money at a low rate and invest at a higher rate, pocketing the difference. Learn about one of his other favorite virtual banks here: Safe, 500%-Plus Profits Since 1998.
And get the full story on Two Harbors here: Sixteen-Percent Dividends... from Residential Real Estate? Yes! 

Market Notes

Bank of America (BAC)... bank 
H&R Block (HRB)... tax preparation 
Canadian Pacific (CP)... railroads 
W.R. Berkley (WRB)... insurance 
AFLAC (AFL)... insurance 
Discover Financial Services (DFS)... credit cards 
Lowe's (L)... home improvement 
Time Warner (TWX)... media and entertainment 
Tootsie Roll (TR)... candy 
Kroger (KR)... grocery store 
Capital Senior Living (CSU)... senior living 
CarMax (KMX)... used cars 
ICICI Bank (IBN)... Indian banking giant 

Baidu (BIDU)... the "Google of China" 
Shanda Games (GAME)... Chinese gaming 
NetEase (NTES)... Chinese gaming and online media 
E-House (EJ)... Chinese real estate services 
Sina Corp (SINA)... Chinese online media 
Tsakos Energy Navigation (TNP)... oil shipping 

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