Attention, ethically minded investors: One well-chosen investment could potentially help clean the environment, reduce crime, and appreciate by 10 percent or more each year.
Experts say the place to seek this investment would be in real estate, a growing favorite among Americans eager to profit from the sector's historic strength and recent boom. Yet to marshal bricks and mortar in a quest to build a better world, investors would need to be proactive long after the purchase - and be willing to craft their own definitions of success.
That's because few real estate investment products are packaged or marketed as "socially responsible." Though investors may choose, for instance, from among more than 300 real estate investment trusts (REITs), none of them touts a social or environmental agenda, according to Gary Pivo, a professor of urban planning and natural resources at the University of Arizona.
Still, whether investors aim to reduce energy consumption or provide a lift to nearby neighborhoods, real estate offers an opportunity to have a social impact they can actually see. And plenty are jumping at the possibility. Fifty percent of mortgages on single-family homes from socially motivated ShoreBank in Chicago, for instance, go to borrowers who are buying a nearby investment property on the city's South or West sides to fix up, rent, or sell.
"They don't trust the stock market, but they're not afraid to put on their overalls on a weekend and paint an apartment," says Jack Crane, senior vice president for mortgage lending at ShoreBank. "They're often coming into distressed neighborhoods where everyone from the community activists to the aldermen to the local business people is just thankful."
Real estate investors can choose from a vast landscape of options that stretch from their own kitchens and bathrooms to rental properties and REITs. But wherever they venture, experts say, certain practices can increase the likelihood of reaping social and financial dividends: Know your goals, do your homework, and have a long-term strategy.
For many a homeowner, real estate investing begins literally at home, where improvements to one's primary residence can boost property value by tens or even hundreds of thousands. For the environmentally inclined, moves to benefit the earth can also reduce utility bills and attract buyers who aspire to keep operating costs down.
Priorities should begin with making a building as energy efficient as possible, according to Patty Rose, executive director of GreenHOME, a nonprofit that aims to make low-income housing more energy-efficient. Begin with weatherstripping for doors and double panes for windows, Rose says. Add appliances with an "Energy Star" seal, water-efficient fixtures, and plenty of insulation. For more tips, consult the United States Green Building Council's rating system (www.usgbc.org). Then expect to see a happy occupant as operating costs drop.
"If someone with a small amount of income gets hit with a big energy bill, it's one of the biggest causes for default on a mortgage," Ms. Rose says. Likewise, when renting to middle- class or low-income tenants who pay their own utility bills, "this is the sector of the housing market where better-performing housing will make the biggest difference."
In real estate, the environment has much at stake. Buildings consume about one-third of all energy, water, and materials in the United States and generate the nation's pollution in similar proportions, according to a 2003 report from the US Green Building Council. But investors can profit from proactive remedies. Efficiency measures can cut the energy costs of a commercial building down to as little as 30 cents per square foot per year, says Nadav Malin, editor of Environmental Building News, a publication for green builders. By contrast, power for an inefficient building can cost as much as $2 per square foot per year.
Those who plan ahead get the greenest buildings at the least expense, Mr. Malin says. Using skylights properly and maximizing windows on walls that run north to south, for instance, can limit dependence on artificial light and create "more pleasant and happier" occupants.
"As long as you start early in the process, and work with designers who know what they're doing, you can do a lot of these things with no increased costs," Malin says. Costs add up, he adds, when owners ask mid-project, "Oh, can we make this a green building?"
Not all real estate investors aspire to be landlords, however. Those with $1,000 or more to invest can receive as much as 3 percent interest from the Capstone Fund offered by Manna Inc., a nonprofit that provides affordable home ownership opportunities in Washington, D.C. The organization has never missed an interest payment, says President George Rothman, and investors know their dollars are helping acquire key properties for rehabilitation and resale.
"For a time, people could get more from us than from their money markets, and feel good about it," Mr. Rothman says. "It's a very secure investment. [Still], this is socially motivated investing, not maximizing your return."
For investors seeking greater returns, REITs may be a better option. Although none come with socially responsible labels, some nevertheless have policies that would please many ethical investors, according to Dr. Pivo.
For instance, seven publicly traded REITs have received recognition for active involvement in the Environmental Protection Agency's Energy Star Program, which promotes energy-efficient buildings. Investors concerned with reducing energy consumption, Pivo says, might consider Arden Realty, Equity Office Properties, Brandywine Realty, Carr America, Glenborough Realty, Parkway Properties, and Prentiss Properties.
What's more, two REITs pass muster with the Domini 400 Social Index. General Growth Properties wins kudos for paying its CEO modestly and for diversity on its board of directors. Maguire Properties gets accolades for aiming to revitalize downtown Los Angeles. Hence, real estate options exist in this realm for ethical investors, but they're not always easy to find.
Investors "are hearing, 'We ought to put some of our money into real estate, but where do we go?' They have no clue where to go," Pivo says. "There's stuff out there, you see, but it's not been systematically represented to the [socially responsible investing] community."
In terms of mutual funds, the Forward Uniplan Real Estate Fund looks for REITs and real estate operating companies that meet certain quality standards, according to portfolio manager Rick Imperiale. Positive indicators include commitments to urban redevelopment, as well as efforts to keep employees and tenants happy.
Even so, Mr. Imperiale's fund doesn't bill itself as socially responsible because the industry is far from clear about what that label means for the real estate sector, he says. Despite the growth of ethical investing in recent years, clarity and unity on what constitutes ethical real estate investments aren't likely to arrive anytime soon.
"It becomes notoriously difficult to define what those [criteria] would be," Imperiale says. "It touches in so many ways on those who would use the real estate. If I own industrial REITs with warehouses used by Philip Morris, would you exclude those [from a socially responsible portfolio]?... I don't think you're going to be able to answer in a hard and fast way what a socially responsible real estate fund would look like."