There won’t be any human on this planet who doesn’t want a secure and stable source of income in their life, particularly after retirement. That’s why people invest in mutual funds. The return may not be high, but there is an assurance. Same goes with REITs in real estate investment. REITs provide fixed returns (subject to market fluctuations) which increases along with the age of the investment. Though not every REIT functions in this way. There are different kinds of REITs available in the market, some of which trade on the National Stock Exchange.

Variation in REITs –

A Real Estate Investment Trust or REIT is a legal trust that owns, and in most cases, operates real estate properties. This kind of investment requires long term commitment and may not suit investors who like short-term benefits. The majority of REITs lease spaces to tenants and receive rents on those properties. On the other hand, some REITs fund loans to real estate developers.

• Equity REITs – Equity REITs give properties on lease and receive rents on those properties. That’s their main source of income. The majority of REITs are Equity REITs. Equity REITs generally have large institutional-grade properties in their portfolio.
• Mortgage REITs (mREITs) – This kind of REITs invest in mortgages and mortgage-backed securities. Mortgage REITs lend money to real estate developers and earn interests on the loan. The profit of a mortgage REIT is calculated by taking out the difference between the interest earned on the mortgages and the cost of financing the loan.
• Hybrid REITs – Hybrid REITs are a combination of Equity and Mortgage REITs. These kinds of REITs lease spaces to tenants as well as lend money to real estate developers.
• Publicly-Traded REITs – These REITs are listed with the Securities and Exchange Commission (SEC) and trade on the National Stock Exchange. The shares of these REITs can be purchased the way you buy the stocks of any other company.
• Publicly Non-Traded REITs – These REITs are also listed with the Securities and Exchange Commission, but they don’t trade on the National Stock Exchange.
• Private REITs – These kind of REITs are only available for selected investors and held privately. Neither they are listed with the Securities and Exchange Commission nor do they trade on the National Stock Exchange. 

Benefits of REIT Investment –

REIT investment is generally accompanied with many benefits, some of which are –

• Regular flow of income – As a REIT investor, you can expect a regular flow of income in the form of dividends. As per the rules, a REIT must distribute 90% of its income among its shareholders, which shows how beneficial a REIT investment could be.
• Liquidity – The ability of a REIT to buy and sell like other stocks or mutual funds is what makes REIT investment more beneficial. The majority of REITs trade on the National Stock Exchange, where they can be easily sold or purchased.
• Transparency – As a REIT investor, you will get audited financial reports for the period of your investment. REITs provide corporate governance aligned with shareholders interests.
• Diversification – With little-to-no correlation with other stocks or bonds, REIT investment is free from how other stocks behave on the stock exchange. When you invest in REITs, you invest in real, tangible assets that can diversify your investment portfolio.

Published On - July 26, 2019

It’s an investor’s responsibility to keep searching for different investment options from time to time. Real estate investment requires a lot of patience and a positive attitude even in adverse situations. Buying a property only requires capital. However, maintaining the same property for a long time requires capital as well as a significant amount of time. That’s why some investors prefer mutual fund investment or Exchange-Traded Fund (ETF) over large individual real estate investments. An alternative to a mutual fund or ETF investment is Real Estate Investment Trust.

What is a REIT?

A Real Estate Investment Trust or REIT is a company or trust that owns, manages, and in most cases, operates income-producing real estate properties. REITs allow investors to own shares in real estate properties without the burden of purchasing and managing those properties. The majority of REITs lease spaces to tenants and earn rents on those properties. While some REITs also lend money to real estate developers and earn interest on the loan. This kind of investment requires a long-term commitment and it isn’t for investors seeking short-term benefits.

Who is it for?

Any investor can invest in REITs. Whether you’re a beginner or a pro, a REIT investment offers similar benefits to everyone. However, it may not suit every investor. An investment structure like REIT is more beneficial for retirees or someone who is on the verge of retirement than someone who is young and looking for short-term investments.  As REITs provide a steady flow of income for a long time, it suits people who have already hung their boots or are planning to do so.

What are the different types of REITs?

• Equity REITs – Equity REITs lease spaces to tenants and earn rents on those properties. These kinds of REITs make money through rents by leasing properties to tenants. The majority of REITs are equity REITs.
• Mortgage REITs (mREITs) – Mortgage REITs lend money to real estate investors and earn interest on the loan. They also invest in mortgages and mortgage-backed securities.
• Hybrid REITs – These kinds of REITs function in both ways. Besides leasing properties to tenants and earning rents on those properties, these REITs also finance loans to real estate investors.
• Publicly-Traded REITs – These REITs are listed with the Securities and Exchange Commission (SEC) and trade on America’s National Stock Exchange.
• Publicly Non-Traded REITs – These REITs are listed with the Securities and Exchange Commission but don’t trade on the National Stock Exchange.
• Private REITs – These REITs are neither listed with the Securities and Exchange Commission nor do they trade on the National Stock Exchange. These kinds of REIT investments are offered to selected investors.

How to invest in a REIT?

You can invest in a REIT the way you invest in other company’s stocks or bonds. A REIT’s stocks can be easily purchased and sold on the National Stock Exchange. When you buy shares in a REIT, you invest in the trust and not in real estate properties. That’s why a REIT investment doesn’t qualify for a 1031 exchange. Real Estate advisors or experts can help in exploring the challenges that come with a REIT investment.

Published On - July 26, 2019

Over the years, REIT investment has become a popular choice among real estate investors, particularly among the retirees. With benefits akin to that offered by a mutual fund investment, REIT lets investors invest in real estate properties without the burden of purchasing and managing those properties. The majority of REITs own, and in most cases operates, income-producing real estate properties. They lease spaces to tenants and then collect rents on those properties. Whereas, some REITs lend money to real estate investors and invest in mortgages and mortgage-backed securities.

Equity or Mortgage REIT – Which is better?

Equity REITs own and operate real estate properties. The primary source of income of an Equity  REIT is the rent they receive by leasing spaces to strong tenants. These kinds of  REITs provide high liquidity as their shares can be easily purchased and sold on the National Stock Exchange.

Mortgage REITs (mREITs) function in a different way. They lend money to real estate investors and invest in mortgage and mortgage-backed securities. The spread between the interest earned on the mortgages and the cost of financing the loan determines a Mortgage REIT’s income.

Since the Equity and Mortgage REITs have different working models, both are beneficial in different ways. Investors seeking instant income can go with Equity REITs. However, as they trade on the National Stock Exchange, they are subject to market risks. On the other hand, those who require funds for their real estate adventures may find Mortgage REITs a blessing in disguise.

How to evaluate a REIT’s cash flow?

Some real estate analysts use FFO (Funds From Operations) as a metric to measure the revenue generated by a REIT. There is a whole formula for calculating FFO. Analysts calculate FFO by adding depreciation and amortization in the net income minus any gain from the sale of real estate properties.

FFO = Net income + Depreciation + Amortization – Gain from the sale of real estate

FFO helps in calculating a more precise value as it adds depreciation in the net income and subtracts any gain the REIT has made from the sale of its real estate. Some analysts also use AFFO (Adjusted Fund From Operations),an advanced version of FFO, to get a more precise value. While there is no derived formula for calculating AFFO, it is taken out by subtracting recurring expenditures from FFO that are first capitalized by a REIT and then amortized. It could be some minor maintenance expenses such as money spent on changing floor carpet or repairing damaged ceiling, and so on.

AFFO =  FFO – Recurring Capital Expenditure

Both FFO and AFFO are used by analysts for calculating a REIT’s cash flow, and you too can use either of them. As REITs don’t need to make maintenance expenditures every day, you may ignore it. However, if you need a more precise value, consider subtracting it from a REIT’s FFO.

Published On - August 12, 2019

Though real estate investments offer great benefits, they don’t guarantee fixed returns. Holding an investment for a long time may result in rising maintenance expenditure on the property, which increases an investor’s liabilities. To give investors a flexible and more secure investment structure, REIT investment was introduced in the United States.

What is a REIT?

A Real Estate Investment Trust or REIT is a company that owns, and in most cases, operates income-producing properties. Akin to mutual fund investment, REITs allow investors to invest in a more flexible and secure investment structure. The majority of REITs lease spaces to tenants and receive rents on those properties. That’s their main source of income.  On the other hand, some REITs lend money to real estate investors and invest in mortgage and mortgage-backed securities.

How a REIT is formed?

A company must fulfill the following requirements to form a REIT –

• The company must invest 75% of its assets in real estate or treasuries.
• The company must receive 75%  of its income through rents, sale of its real estate or from interests on the mortgages.
• The company must distribute 90% of its income among its shareholders.
• The company must have at least 100 shareholders after one year of its existence.
• The company must be taxable as a corporation.
• Not more than 50% of the company’s shares should be held by its five or fewer shareholders.
• The company must be managed by a board of directors or trustees.

Benefits of REIT Investment –

• Transparency – REITs are highly transparent as they disclose the capital portfolio annually and half-yearly.
• Easy to buy and sell – A REIT’s shares can be easily purchased and sold on the National Stock Exchange. The majority of REITs are listed with the Securities and Exchange Commission and trade on the National Stock Exchange.
• Higher Dividend – This kind of investment offers a higher dividend to investors as a REIT must distribute 90% of its taxable income among its shareholders.
• Lower Risk – REITs have lower liquidity risk as compared to direct real estate investment.

Types of REIT –

• Equity REITs – These kinds of REITs lease spaces to tenants and receive rents on those properties. This is the main source of earning of an Equity REIT. You can invest in Equity REITs just like you buy stocks of other companies.
• Mortgage REITs (mREITs) – Mortgage REITs work differently. They don’t lease spaces to tenants, instead, they lend money to real estate investors and earn interests on the mortgages and mortgage-backed securities.
• Hybrid REITs – These kinds of REITs function both ways. They lease spaces to tenants as well as lend money to real estate investors.

What’s the right time to invest in REITs?

There is no so-called right time to invest in REITs. REIT investment can be planned anytime in a calendar as it provides the same benefits irrespective of the time when the investment is made. However, you may want to consult your financial advisor or a REIT expert before investing in REITs.

The reasons why an individual chooses to invest vary; however, most cite earning a high return on investment as one of their financial objectives. Whether it is immediate income or capital appreciation, wealth accumulation is a primary consideration for investors.

One investment that meets this financial objective, while providing additional benefits, is a real estate investment trust (REIT). A REIT is “a corporation that owns and/or manages income-producing commercial real estate. When individuals buy a real estate investment trust … share, they are purchasing a share of the company that owns and manages the rental property.”

Historically, REITs – both private and public – have outperformed the stock market, providing investors with higher returns than equity investments. This article reviews the types of REITs that exist, historical returns for private vs. public REITs, and ways to identify suitable investments for a portfolio.

Types of REITs: Public vs. Private

REITs can be classified as either private or public.

Public REITs

Public REITs are regulated by the U.S. Securities and Exchange Commission (SEC). They must meet certain qualifications and register and file regular reports with the SEC.

Public REITs can be further divided into publicly traded and public non-traded. Anyone can invest in either type; however, the form of investment differs. Publicly traded REITs are traded on an exchange, such as the New York Stock Exchange (NYSE) or NASDAQ. Well-known publicly traded REITs include Camden Property Trust (CPT), Realty Income Corp (O), and The Howard Hughes Corporation (HHC). Meanwhile, public non-traded REITs are purchased by working with an individual broker or financial advisor. Public non-traded REITs offer similar benefits and disadvantages as private REITs.

Private REITs

Private REITs are real estate funds or companies that are exempt from SEC registration and are available only to institutional or accredited investors. An accredited investor is defined as either 1) an individual whose net worth is more than $1 million, excluding their primary residence (individually or with a spouse or partner) or 2) an individual whose income is more than $200,000 (individually) or $300,000 (with a spouse or partner) in each of the prior two years and reasonably expects the same for the current year. Investments are available through private placement and, unlike public REITs, require a higher minimum investment, ranging from $1,000 to $25,000 (sometimes more).

REITs in Terms of the Numbers

Introduced in 1960, REITs have become a vital part of our economy. According to data released by Nareit:

• In the United States, 145 million people live in households with a REIT investment through a 401(k) or another investment funds.
• REITs own approximately 535,000 properties across the United States.
• REITs help finance one million homes in the United States.
• REITs contributed the equivalent of an estimated 2.9 million full-time jobs to the U.S. economy in 2020, generating $197 billion in labor income.
• REITs invested $85.2 billion in new construction and routine capital expenditures to maintain existing property in 2020.
• REITs of all types collectively own more than $4.5 trillion in gross assets across the United States, with public REITs owning $3 million in assets.
• U.S.-listed REITs have an equity market capitalization of more than $1.4 million.

While REITs are a major contributor to the economy, what returns are investors potentially going to achieve when adding REITs to their portfolio? To better answer this question, it’s important to look at the historical performance of public and private REITs and outline the risks associated with each. Accredited investors should consider both factors when determining which REIT to invest in.

REITs vs. Stocks

Before reviewing the difference in returns for private versus public REITs, let’s first look at how REITs perform compared to stocks. The Motley Fool explains that “REITs have outpaced the S&P 500's total return since NAREIT began tracking their performance in 1972. Thus, one could definitively state that REITs have outperformed stocks over the long term.” While “that has certainly been the case in more recent years as stocks outperformed REITs in 2019 and the prior 5- and 10-year periods … REITs have come out ahead over much longer timeframes as they've outpaced stocks during the last 20- and 25- year periods.”

Data reveals that “over a 25-year period, the index returned 9.05% compared to 7.97% for the S&P 500 and 7.41% for the Russell 2000.”

Private vs. Public REITs

Return on public REITs – more specifically, publicly traded REITs – can easily be determined. Since shares are publicly traded, these REITs are required to report their earnings and dividends. Looking at the past 10 years, “ as of June 2022, the index's 10-year average annual return was 8.34%. Over a 25 year period, the index returned 9.05% …”

Private REIT data, however, is not so simple to determine. Lack of transparency makes it more difficult for investors to understand what to expect. To help differentiate between the two, we turn to the expert opinion of Brad Thomas, an experienced real estate professional. Thomas recently shared an article outlining the difference between private and public REITs, pointing out that returns on private

REITs have the potential to be higher than those on public REITs. He recalls one of his experiences, which supports this possibility.

“When I harnessed institutional capital in 2003 and 2011 to co-found two net-lease REITs … the founding institutional investments flowed into STORE Capital (STOR) in 2011 and concluded prior to our 2014 IPO. By the time of their exit in the first quarter of 2016, our founding institutional shareholders had generated returns that exceeded their initial expectations and mine; they made an approximate 26% annual rate of return.”

He shares another example of what investors recently experienced in the private REIT sector. “In 2017, Blackstone (BX) introduced the Blackstone Real Estate Income Trust (BREIT), an open-ended privat REIT designed to deliver private real estate asset management to retail investors. … At the end of June 2022, BREIT's NAV per share had risen roughly 50%, versus just a 10% rise in VNQ's [Vanguard Real Estate Index Fund ETF, a publicly traded REIT] per share valuation. Much of the performance divergence rests in BREIT's investment mix.”

Historically, Thomas said, “had you been a buy-and-hold REIT investor between 1990 and 2022, you could have likely been happy socking away your 10.5% annual rates of return.”

Not all data reveals the same returns; however, most reports share the same concept: private REITs offer higher return potential than public REITs. To provide an alternative opinion, let’s look at an article released by The Motley Fool. According to certified financial planner Matthew Frankel, While Mr. Frankel discusses risks associated with private REITs and why they are not a great investment for everyone, he states that, “Generally speaking, private REITs pay higher dividends than comparable public REITs. Public REITs have historically paid dividend yields in the 5–6% range, on average, while private REIT dividend yields have historically been in the 7–8% ballpark, according to National Real Estate Investor.”

Where to Invest

As mentioned, all REITs – private, publicly traded, and public non-traded – all have unique pros and cons.

Public REITs “are a popular way of investing in commercial real estate, especially for those who have limited funds to invest. REITs have a low barrier to entry; someone can buy a single share for less than $100 … [and] these shares are generally highly liquid … [shares] can often be bought and sold with the click of a button just as you would trade other stocks or bonds. The liquidity of [public] REITs … makes them particularly attractive for those who want to diversify their portfolios by investing in commercial real estate, but who cannot or do not want to have their capital tied up for extended periods of time.”

By contrast, those looking for higher return potential should consider private REITs. However, investors must consider the associated risks. Private REITs are

• not regulated by the SEC, and therefore lack transparency;
• incur higher fees, including commission fees;
• lack liquidity (there is no secondary market); and
• are only available to accredited investors.

The key to any portfolio is diversification. Incorporating a REIT option, including a private REIT, may protect investors against economic volatility. Those interested in learning more can speak with a qualified professional at Perch Wealth.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only, and should not be relied upon to make an investment decision. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

Real Estate Risk Disclosure:

• There is no guarantee that any strategy will be successful or achieve investment objectives including, among other things, profits, distributions, tax benefits, exit strategy, etc.;
• Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
• Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
• Potential for foreclosure – All financed real estate investments have potential for foreclosure;
• Illiquidity – These assets are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
• Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
• Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits
• Stated tax benefits – Any stated tax benefits are not guaranteed and are subject to changes in the tax code. Speak to your tax professional prior to investing.

Real estate investing has long been considered a reliable way to attempt to build wealth. However, real estate investing requires active management, driving away many of today’s accredited investors. In 1960, a solution to this problem was presented in the form of real estate investment trusts, or REITs – Congress established REITs to “allow individual investors to invest in large-scale, income-producing real estate. REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership – without actually having to go out and buy commercial real estate.”

Since the introduction of REITs, the industry has been booming. National Real Estate Investor recently reported, “The U.S. alone boasts 222 publicly-traded REITs, and IRS records show that about 1,100 listed and non-listed REITs pay taxes. … REITs now operate in 39 countries overall. Today, the market cap of the FTSE Nareit All REITs Index, the broadest index for equity and mortgage REITs in the U.S., stands at $1.1 trillion.”

The question now is, how can one seek to build wealth through REITs? To understand the answer, let’s look at some primary concepts related to REITs, their historical returns, and the process for investing in REITs.

What is a REIT?

A REIT is a company that owns and operates income-producing real estate and real estate-related assets. REITs differ from other real estate funds in their structure and operation. Regarding operational intent, REITs acquire and develop real estate properties for their portfolios; their intent is not to buy and sell for a profit but rather to work to benefit from a long-hold period with the real estate.

Types of REITs

REITs can be broken into three categories:

1. Equity REITs own and operate income-producing real estate.
2. Mortgage REITs provide money to real estate owners and operators either directly in the form of mortgages or other real estate loans or indirectly through acquiring mortgage-backed securities.
3. Hybrid REITs are companies that use the investment strategies of both equity REITs and mortgage REITs.

Generally, individual investors looking to build or preserve wealth invest in equity REITs over mortgage REITs because the latter often comes with greater risk. For example, mortgage REITs tend to be highly leveraged and, consequently, are vulnerable to changing interest rates. Therefore, those hoping to enjoy the benefits potentially provided by a REIT should consider an equity REIT option.

Seeking to Build Wealth Through REITs

REITs offer various potential avenues investors can leverage to attempt to build wealth. Here are a few.

• Dividend income. Purchasing shares of a REIT may provide investors access to dividend income, which is income paid to shareholders out of the profits of the corporation. Equity REITs derive their income from the collection of rental income. Per law, at least 90 percent of a REITs taxable income must be distributed to shareholders annually as dividends. Generally, investors opt to reinvest their dividends instead of withdrawing cash. This allows them to build equity in a REIT and preserve capital – dividend reinvestment is automatic and does not require an investor to pay any commissions; therefore, more capital can be invested.
• Inflation hedging. Real estate is one of the few investments that offer a potential hedge against inflation – in other words, it seeks to protect investors against a decrease in the purchasing power of money. Over the past ten years (2011-2021), the inflation rate has averaged 2.01 percent. Most real estate assets include a rental increase, allowing real estate values to increase as inflation occurs. Traditional investments such as stocks and bonds do not have this characteristic.
• Long-term capital appreciation. REITs, like real property investments, offer long-term capital appreciation potential. Over time, real estate values generally increase, and, as a result, an investor’s equity in the trust increases as well. If a REIT purchases real estate and holds the property in its portfolio for more than a year, individual investors are then taxed based on the long term capital gains rate. This rate is generally lower than the short-term capital gains and income tax rates.
• Historically higher returns compared to equities. The Motley Fool recently shared an analysis that compared equity performance to REIT performance. Data showed that, generally, REITs have outpaced the S&P 500’s total return, according to NAREIT (1) . Over the last 25 years, the S&P total annual return averaged 12.1 percent, while the FTSE NAREIT All Equity REITs total return averaged 13.3 percent.
• Possibility of preservation of wealth through diversification. Most REITs consist of hundreds of properties that span the country, thereby creating diversity within the trust. Purchasing a single asset, on the other hand, offers no diversity. Investors who own direct real estate must invest exponentially more capital to get similar diversity, although this is rarely achieved since REIT portfolios can contain billions of dollars in real estate. This diversification enables investors to seek to preserve wealth during economic uncertainty. For example, if one market declines, another market may improve, offsetting an investor’s losses.
• Pass-through deductions. Until 2025, individual REIT shareholders can deduct 20 percent of their taxable REIT dividend income (excluding dividends that qualify for capital gains rates). This provision, which currently has no cap on the deduction, no wage restriction, and no requirement for itemized deductions, effectively lowers the federal tax rate on ordinary REIT dividends. Most significantly, investors in the highest tax bracket can leverage this provision to reduce their tax rate from 37 percent to 29.6 percent.

Which REITs should one consider investing in?

REITs can be categorized in various ways, and most of today’s REITs specialize in investments in certain asset classes. For example, there are retail REITs, office REITs, residential REITs, healthcare REITs, and industrial REITs, to name a few. While each offers a different level of return potential, recent data from Motley Fool outlines how various REIT subgroups performed in recent decades compared to the S&P 500; it shows that all REIT subgroups have outperformed the S&P 500. The S&P 500 experienced a 9.3 percent average annual total return between 1994 and 2019. In contrast, office REITs averaged 12.9 percent; industrial REITs averaged 14.1 percent; retail REITs averaged 12 percent; residential REITs averaged 13.7 percent; diversified REITs averaged 9.8 percent; health care REITs averaged 13.4 percent; lodging/resort REITs averaged 10.2 percent; and self-storage REITs averaged 16.7 percent.

Thus, most REITs have the potential to help investors build wealth.

How does one invest in a REIT?

Investors – depending on their financial position – have three options for investing in REITs.

All investors can invest in publicly traded REITs and publicly non-traded REITs. Publicly traded REITs are regulated by the U.S. Securities and Exchange Commission (SEC); shares of these REITs are listed on a national securities exchange and publicly traded. Non-traded REITs are also registered with the SEC but are not publicly available. Rather, most investors must work with an individual broker or financial advisor.

While public non-traded REITs generally come with higher commissions and are less liquid, they tend to offer investors the potential for higher returns and greater stability since they are not subject to market fluctuations. However, this comes with increased risk, as well.

A third option – private REITs – are generally available only to institutions or accredited investors. This option typically represents the highest potential for both returns and risk.

Today, hundreds of REITs collectively own trillions in gross assets across the United States. Identifying which REIT is most suitable for a portfolio is best done by speaking with a qualified professional about today’s investment opportunities.

(1) The National Association of Real Estate Investment Trusts (NAREIT), which was formed in 1960, has been keeping track of historical return data for the REIT sector since 1972. It has developed several indexes to track returns, led by the FTSE NAREIT All Equity REIT Index. This index contains all 12 equity REIT subsectors (it excludes mortgage REITs, which aren’t classified in the real estate sector but are instead considered financial companies).