Article 3 of 5: Real Estate As An Investment Option
This is the third in a series of five pieces to help investors understand the benefits of owning commercial real estate, then differentiate the dynamics and variety of ownership channels.
Many investors get started in real estate by owning one or more individual properties.
They may elect to rent an earlier home, acquire a property that already has a tenant, or inherit one that they decide to rent. In this case, the owner must choose to engage a property manager or become the landlord. In addition to dealing with tenants, repairs and maintenance, there are periodic costs for roofs, painting and prepping between tenants.
Investors wanting to start or build a portfolio of individual properties
are typically limited to whatever comes available in their market, within an affordable price range and may leverage local expertise and market research. There are also the complications of handling the finances and tax implications. Individual property values are always tied to the local economy.
There are billions of dollars invested in public real estate securities.
There are mutual funds, exchange traded index funds and a host of public REIT stocks. REIT is an acronym for Real Estate Investment Trust, a business form created by Congress in the early 80’s, that must pay out 90% of net taxable income. More than 20% of REIT shares are owned by institutional investors, like pension funds or insurance companies.1
Public real estate securities are sensitive to the national economy and market volatility.
About half of public REIT stocks are owned by larger mutual or exchange-traded funds. One of the biggest exchange-traded funds (XLRE) is based on a real estate index. Some examples of REIT stocks are SPG (malls), SLG (focused on New York City), NNN (single-tenants, such as gyms, 7-Eleven, big box retail, and restaurants), CTT (timber), and AMT (cell towers).
A big advantage to owning private real estate is avoiding the fluctuations of public markets.
Even though the underlying buildings in a public REIT are fairly stable, market forces like a recession may force stocks down, or attractive yields during low interest rates may push prices too high. Many non-traded REITs limited trading at the underlying portfolio’s Net Asset Value, which avoids both of this mis-pricing situations.
If you’re interested in learning more, reach out to us about your situation.
Access our fourth installment, “Advantages of Owning Private Real Estate Portfolios”