Monica Masuda is not a casual real estate flipper.

Using a deliberate buy-and-sell strategy, the former investment banker now owns 600 units in seven properties, after selling 20 apartment buildings over the past five years worth about $50 million.

"I look for undervalued assets, mostly coastal properties," said Masuda, a mother of three whose husband brings home a regular paycheck. "I reposition the apartment buildings, put money in to fix them up, raise the rents and then I sell and buy a larger unit."

But while Masuda is in escrow on three new buildings in Long Beach and Santa Ana, she has been a net seller in Redondo Beach and Hermosa Beach, where prices are sky-high.

Real estate investors like Masuda, who form the backbone of Southern California's frenzied housing market, show tentative signs of getting out or at least lightening up on assets deemed vulnerable to a market drop.

Investors who have witnessed the booms and busts of past cycles are selectively selling investment properties, even as prices continue to rise.

In some cases, they are taking profits by selling properties in Southern California and then reinvesting in Nevada, Arizona and Washington, where prices for homes, apartment buildings and condominiums are lower. Or they are turning to areas with more down-and-out properties, like Long Beach, and selling in pricier markets like Manhattan Beach.

Private equity funds and other long-term value players are churning their portfolios in much the same way as Masuda. They are selling older units and buying newer ones, or moving into outlying areas where price appreciation has been strong but not ridiculous.

"We're probably passing on a lot more deals than we normally would right now because we see bidders outbidding the more rational investment buyers like ourselves," said Jim Rosten, president of Kennedy-Wilson Properties Ltd., a unit of Kennedy Wilson International in Beverly Hills, which operates two real estate funds and manages 55 million square feet of property in 21 markets.

Because there is such a strong demand for housing in Southern California, and so little affordable product, Rosten believes that trouble will come not from a wholesale bursting of a bubble, but from some borrowers who are unable to carry their mortgages when interest rates rise.

"A lot of people are qualifying for gimmicky loans on the margin," he said. "But the economic chemistry of Southern California is still very positive."

'Anti-bubble person'
In Los Angeles, where real estate has turned into a spectator sport, many are adamant that no housing bubble exists. "I'm the biggest anti-bubble person out there," said Robert D'Elia, managing partner of RAD Management LLC, a Santa Monica-based developer who is converting a vacant 37-story downtown office building into condominiums.

D'Elia believes there has been a fundamental shift in American society, which now views real estate as less risky than stocks. "There's a lot of institutional money out there looking for real estate deals, more than I've ever seen."

Yet that represents one of the conundrums plaguing Southern California's buoyant real estate market good investment properties are hard to find, and there are far more buyers chasing sellers. That has the effect of driving up prices.

This has occurred at a time when Federal Reserve Chairman Alan Greenspan sees "froth" in the U.S. housing market and regulators have sounded alarms about the widespread use of interest-only loans, where borrowers could end up owing more than the value of their home if interest rates rise.

Many investors, including institutions, still can't seem to get enough real estate. A survey by U.S. Trust found that 67 percent of affluent Americans believe real estate is the most promising sector to invest in over the next 12 months.

California's two big pension funds, California Public Employees' Retirement System and California State Teachers' Retirement System, also are searching for good deals.

Calpers set a target in January of allocating 8 percent of its investments to real estate. So far, it has only reached 6.2 percent, with $11.4 billion invested. Calstrs set a 6 percent target in April, but has only 4.5 percent, or $5.5 billion, invested.

L. Bruce Fischer, a partner at Morgan Lewis who specializes in financing for private equity funds, said sellers with tax-related requirements are making it tougher for institutions, forcing them to find ways to evaluate properties faster in an effort to close deals in just 20 to 30 days.

A 1031 tax-deferred exchange is the most common tax-deferred real estate transaction. It allows sellers to defer taxes on profits from the sale of property by finding a similar investment within 45 days and concluding the transfer within six months. The volume of such transactions handled by Timcor Exchange Corp., a facilitator of 1031s in Southern California, is up nearly 40 percent this year to roughly 10,000.

"This category of buyers is making it tough for institutions and creates a push on all other buyers and a lot of frenzy in the marketplace," Lewis said. Some buyers, he said, have ducked out of the market with prices so high.

Smaller returns
The capitalization rate, known as cap rate, measures the return on an investment and is used by real estate investors to measure whether deals will pencil out. If the cap rate is low, the selling price is considered to be high.

Larry Bloomer, a principal at Coldwell Banker Commercial Westmac, said cap rates have dropped so quickly in the past year that some investors are selling off certain sectors of the market, like apartment buildings, and buying retail properties like shopping centers, which have more stable cap rates.

"We see an awful lot of people that are inexperienced and are purchasing these properties and as the interest rates go up, the new buyers may not be owners for very long," he said.

Apartment buildings in Southern California are considered a primary arena for speculation on the part of professionals like lawyers and doctors, who like to park their money and see it grow. Bloomer is waiting for newer players to go bust in another two to three years, when investors find they are unable to raise rents high enough to cover their mortgages.

"We're going to see some foreclosures because people are unable to come up with the equity they need," he said.

Hal Harley, managing director of Deutsche Bank's private wealth management group, said one of his clients, a wealthy real estate developer, decided to cash out many properties when a waiter at his favorite Italian restaurant disclosed that he was buying and selling homes as a side business.

"It reminded me of the anecdote about John D. Rockefeller, who got out of the stock market a few months before the 1929 crash because the guy who shined his shoes was buying and selling stocks," said Harley. "Veterans know this market can go upside-down very quickly."

Harley sees a similarity to the dot-com bubble that burst in March 2000, when the Nasdaq topped out at 5,132. It has never revisited those highs. At that time, investors were buying telecom and Internet stocks, the IPO market was backed up, and venture capitalists were scrambling to find start-ups to pour money into. People talked of a "Goldilocks" economy that would grow for years with low inflation.

With people saying similar things about real estate, Harley is advising clients to rotate into health care stocks, which he says are undervalued.

"No asset class is ever a top performer year-in, year-out," he said.

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