Residential real estate is a great way for investors to own a piece of real estate, but it certainly isn't the only way. Investing in commercial real estate such as shopping malls, medical office buildings, large properties, and hospitals can provide investors with an income source, potential tax benefits, protection against inflation, and significant growth opportunities. Additionally, real estate is a great way to add diversification benefits when combined with other types of unrelated investments such as stocks and fixed income securities. Therefore, commercial real estate can provide investors a means of protection against volatile market conditions.
investment opportunity
Years ago, commercial real estate investing was only accessible by institutional and wealthy investors and trust funds with significant financial resources. Today, with the advent of products such as real estate investment trusts (REITs), many investors now have access to commercial real estate investments and opportunities that were previously only available to the cream of the crop.
how it works
The most widely used vehicle for investing in commercial real estate is the REIT. Although investing in commercial real estate 50 years ago was limited to wealthy individuals and companies, since the inception of REITs, the real estate market has attracted a much larger and broader group of investors because it has allowed regular investors to participate. Has given. REITs are like most other funds in the way they obtain capital for their operations. They collect money from investors and pool all the money to acquire real estate such as hospitals and office buildings. As long as REITs closely follow the laws applicable to them, specifically distributing at least 90% of their total taxable income to investors, they avoid double taxation of their income at the REIT level. These distributions are the main source of income for REIT investors.
When investors put their money into a REIT, they are placing their money in the hands of real estate professionals who monitor changes and trends in the real estate market, mortgage price movements, regional trends, and other factors. Apart from all the external factors, the success of a REIT will also be influenced by the skill, experience and talent of the fund manager.
REITs come in two forms: traded and non-traded styles. Each has its own advantages and risks. However, this article focuses on non-traded REITs.
potential benefits
Non-traded REITs may offer the following:
Fixed income streams. Non-traded REITs may provide revenue streams in the form of monthly or quarterly distributions. This provides stable cash flow to fixed income investors.
Customer Security. Although fluctuations in the economy can affect real estate values, REITs that invest in quality real estate assets can retain their value.
Capital growth. With a long enough time horizon, real estate can provide investors with back-to-back discretion that can translate into great rates of return.
Protection from inflation. Real estate generally endures the corrosive nature of inflation.
tax benefits. Many investors benefit from real estate investments because taking advantage of depreciation deductions reduces the investor's taxable income. When the asset is sold, potentially lower capital gains taxes are imposed on the income protected by the deduction.
potential risk
The following risks are possible with non-traded REITs:
Some REIT real estate property may have been purchased at an excessively high price which may limit the overall growth of the REIT portfolio as the REIT may take the risk of not being able to sell the property at a more appreciated price. These types of properties may or may not provide cash flow to the REIT.
Non-traded REITs are generally suitable for long-term investment horizons of 5 to 10 years which makes them illiquid investments.
The investment objectives stated in the real estate investment fund's prospectus are an objective and not a guarantee. Customers may see a difference in the expected level of delivery they receive and the delivery rate.
commercial real estate investment strategies
Think carefully about the risk you are willing to take to justify the expected return. Higher returns usually go hand in hand with higher risk. Individual investors need to be comfortable with the level of risk they are willing to take and then tailor their returns to their unique level of risk without leaving their comfort zone.
REITs are generally divided into three main categories, each with its own advantages and risks:
1. Primary investment programs focus on long-term real estate holdings to generate steady income streams for their investors and possibly some upside on the back end. Investors who find these programs attractive usually focus on obtaining a source of income to supplement their existing income.
REITs that fall into this category of primary real estate investments invest their money in well-established real estate markets with a focus on high-quality, stable, well-maintained and low-leveraged properties. Buildings generally have minimal required maintenance such as repairs.
Managers select properties in different markets and look at the financial stability of the tenants in the properties they choose.
2. Value Added Group invests in real estate that has the potential to provide significant capital growth to investors. Therefore, these assets carry with them a higher level of risk and are usually financed with some degree of leverage. Investors who look for asset value rather than current income in their investment plans may find this group of REITs more suitable for their investment goals.
When purchasing these types of properties, managers are inclined to purchase properties that may have some operational or management problems such as average or below average occupancy rates. In hopes of replacing these investments, the REIT may try to somehow improve or relocate distressed areas of the property by finding high-quality tenants. Once their bids increase the value of the asset, the manager may consider selling the asset to capture winnings.
3. An opportunistic REIT seeks to invest in real estate that will yield the highest possible returns and therefore can accept a large amount of risk to reach its objectives. Investors in this type of REIT require a minimum amount of current income and are looking for significant capital growth in the short term.
These investments are generally not suitable for individuals seeking a steady stream of income, but rather those who want to increase the total returns in their portfolio through capital appreciation. REIT principals create value by finding properties in geographically diverse markets where growth potential is high. Fund managers invest in real estate for short periods of time and are generally willing to recapitalize some properties to increase returns.
you don't have to do it alone
REITs can be complex investments to evaluate and may be more complex to incorporate into your existing portfolio and investment goals. The financial advisors at Isakov Planning Group can help you decide if REITs are right for you.
