Article 5 of 5: Real Estate As An Investment Option
This is the final installment in a series of five blogs on how Owning Real Estate Complements Stock Risks. The series addresses the attributes and differentiating factors of real estate that pair nicely with traded stocks. The third & fourth segments review public real estate securities and the advantages of private real estate offerings.
Our previous blog in this series outlined the Advantages of Owning Private Real Estate. In summary, investors in private offerings will likely capture higher yields, realize less volatility, and have greater diversification benefits than public securities.
Private real estate can be accessed through a variety of investment vehicles. Below we discuss four categories.
Interval Funds are structured to trade like mutual funds but with limited liquidity. They are typically a “fund-of-funds”, meaning they invest in other real estate funds – large institutional funds that an individual investor would otherwise be unable to access. Interval funds keep some public stock and debt in their portfolio for liquidity. Since the underlying institutional funds have limited liquidity, interval funds also impose redemption limits. Typically, investors can only redeem 5% of the fund’s value per quarter. The interval fund may also have a one-year hold required to avoid a short-term redemption fee.
NAV REITS are perpetual-life REITs that directly own properties. NAV stands for net asset value, which is the value of the REIT’s assets minus its liabilities. These REITs are named for the way that their shares are priced, at their NAV per share rather than a price determined by trading forces. They are generally diversified portfolios focused on core property sectors. Liquidity limitations are similar to interval funds, but NAV REITs have more discretion than interval funds and can shut down redemptions during periods of portfolio stress. Federally, investors are required to meet moderate income and/or asset thresholds to invest in NAV REITs. Many states have additional requirements or limitations.
Private Placements are relatively small, narrowly focused, and riskier investments. They may be for new development, renovation projects or even rehabilitating distressed properties. Utmost care must be taken to evaluate the managers, strategy and track records. There are no liquidity windows and in some cases no income distributions. They bring the higher Accredited Investor standard, which is for millionaires or exceptionally high earners.
Delaware Statutory Trusts (or DSTs) are designed to accept 1031 Tax-free Property Exchange proceeds. Current tax law allows real estate sellers to defer capital gains by reinvesting all proceeds into a replacement property, or DST that owns replacement properties. DSTs may be illiquid for 10 years or more. They are also only available to Accredited Investors.
If you’re interested in learning more, reach out to us about your situation.
1 Registered Representatives that work through Broker/Dealers are entitled to charge these commissions, which are usually in the 6% – 7% range. Investment Advisors, who are held to a Fiduciary Standard, do not charge commissions for investments.
To start from the beginning of our series: