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TheStreet Open House

Invest in Dividend Stocks, Not Detroit Real Estate

Stocks in this article: KOWFCUSBSU

NEW YORK (TheStreet) -- A recent article from Forbes.com reported Chinese investors were "buying up Detroit" because the prices were so low, just $39 for a house.

Sight unseen, Detroit properties were being snatched up as China Central Television, the state broadcaster, reported that two houses in Detroit cost the same as a pair of leather shoes. The smartest thing the Chinese investors could do is walk right by those Detroit houses.

In the Forbes piece, Caroline Chen, who sells Detroit real estate, says, "I have people calling and saying, 'I'm serious -- I wanna buy 100, 200 properties. They say, 'We don't need to see them. Just pick the good ones.'" One doesn't have to see the houses to know that there are no "good ones" for $39. If there were, local investors would have purchased the houses long ago.

For right around that $39, the Chinese buyer could invest in a share of Coca-Cola (KO), Suncor Energy (SU), U.S. Bancorp (USB) or Wells Fargo (WFC),  .

What these companies don't require -- unlike a $39 house -- is thousands and thousands of dollars' worth of work to start generating income. There is no way a house for $39 is in shape to be rented. If it were, it would have been long, long ago.

Houses are expensive to own in terms of time and money. Stocks aren't. Investors don't even have to take possession of a paper certificate anymore.

A $39 house is still going to need a new roof eventually for about $15,000. If it is not maintained properly, the foundation will have to be fixed, which can be another $15,000. Not to mention wiring, plumbing, carpet, paint and appliances expenses.

If a house is selling for $39, it is pretty much assured many of those repairs will be needed before it could be rented. It is also a legal liability until it is up to code as cities levy hefty fines and nuisance taxes on vacant properties.

If someone gets hurt on the property, that is a lawsuit. All of that money going into fixing up a house in a terrible neighborhood could be buying many shares of Coca-Cola, Suncor Energy, Wells Fargo or U.S. Bancorp without any of the drama or the legal liability.  In addition, dividend income would be received immediately.

The issue of quality in investing comes into play here, too.

In a recent interview with Fortune magazine about the best advice ever received, Warren Buffett stated that Charlie Munger, his partner, convinced him to buy assets of a high quality. Previously, Buffett had bought mediocre assets at mediocre prices. 

There is not enough lipstick in the world to put on a $39 sow's ear of a house to make it a good investment. The entire city of Detroit would have to be revitalized. Buffett is a major shareholder of Coca-Cola, Suncor, U.S. Bancorp and Wells Fargo. None of those companies requires any resurgence and each is high quality.

Purchasing a house in Detroit thousands of miles away because it is cheap will, most likely, turn out to be an expensive lesson for the Chinese buyers. 

There is no substitute for quality in investing, a lesson taught to Buffett that the Chinese buyers of Detroit real estate will surely learn the hard way.

At the time of publication, the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Yates is a financial writer who has had thousands of articles appear in periodicals and Web sites such as TheStreet, Newsweek, The Washington Post and many others. Much of his career was spent working on Capitol Hill for Members of Congress in both the House and Senate, on both committee and personal staff.  He was also General Counsel for a publicly traded corporation.  He has degrees from Harvard University, Georgetown University Law Center and The Johns Hopkins University.

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