Real Estate

For many, real estate investing can be scary because it is uncharted territory. Unlike stocks and bonds, often called “traditional assets”, real estate is considered an “alternative asset” and has been historically expensive and difficult to access and afford for the average person, until recently.

Traditional real estate investing has been effected by technology just like stocks and commodities, opening up the markets to many retail investors. 

To put it simply, real estate investing is the purchase, ownership, lease, or sale of land and any structures on it for the purpose of earning money. 

Real estate generally breaks down into four categories: 

1. Residential - Residential real estate consists of single-family homes, multi-family homes, townhouses, and condominiums. Occupants may rent or own the properties that they live in. Homes larger than four units are generally considered commercial property
2. Commercial - Commercial real estate (CRE) is property that is used for the purpose of business. Commercial real estate is classified as office space, retail space, or multi-family homes. Some examples include business offices (office), restaurants (retail), and large apartment buildings (multi-family).
3. Industrial - As the name suggests, these properties serve an industrial business purpose. Some examples include shipping or storage warehouses, factories, and power plants.
4. Land - Land generally consists of undeveloped property with no structures on it. Landowners can earn money through land usage, such as agriculture, or upon the development or sale of the land.

There are three main ways to make money from real estate investments:

1. Interest From Loans - A real estate loan is an arrangement where investors lend money to a real estate developer and earns money from interest payments on the principal of the loan, providing regular cash flow for the investor.
2. Appreciation - As with the ownership of any equity, real estate ownership gives an investor the ability to earn money from the sale of that equity. The appreciation, or increase in the value of a property over time, represents the potential profit available to an investor when that property is sold.
3. Rent - A property can be leased by owners to earn income from rental payments. As with the income generated from a debt investment, rental income can provide a regular income stream.

A real estate investment trust (REIT) is a company that makes debt or equity investments in commercial real estate. 

Generally, REITs offer a portfolio of income-producing real estate to investors. Investors buy shares of the REIT and earn income from its debt and equity investments in the form of dividends. 

Similar to mutual funds, REITs were created as a way to give ordinary investors public access to real estate investments. 

By law, a REIT must:

• Earn at least 75% of its gross income from real estate
• Invest at least 75% of its assets in real estate
• Distribute at least 90% of its taxable income to shareholders each year

Most REITs are publicly traded like stocks, which makes them highly liquid (unlike physical real estate investments).

REITs invest in most real estate property types, including apartment buildings, cell towers, data centers, hotels, medical facilities, offices, retail centers, and warehouses.

REITs can be categorized two different ways:

1. What type of holdings do they have
2. How their shares are purchased (Public / Private)

• Equity REITs - Most REITs are equity REITs, which own and manage income-producing real estate. Revenues are generated primarily through rents, not by reselling properties.

• Mortgage REITs - Mortgage REITs lend money to real estate owners and operators through mortgages and loans.

• Hybrid REITs - Hybrid REITs are a combination of both equity and mortgage REITs.

• Publicly Traded REITs - Shares of publicly traded REITs are listed on a stock exchange, where they are bought and sold by investors.

• Private REITs - Private REITs are not registered with the SEC and do not trade on stock exchanges. In general, private REITs can be sold only to institutional investors.

•  Liquidity - REITs are easy to buy and sell, as most trade on public stock exchanges. This allows investors to quickly liquidate their commercial real estate assets unlike physical real estate. 

• Stability - REIT total return performance for the last 20 years has outperformed the S&P 500 Index, other indices, and the rate of inflation. REITs can play an important part in an investment portfolio because they can offer a strong, stable annual dividend and the potential for long-term capital appreciation. 

• Diversification - REITs provide diversification in a portfolio because real estate has historically had a low correlation to stocks.

• Efficiency - REITs offer attractive risk-adjusted returns and stable cash flow relative to other publicly traded stocks.

• Transparency - REITs that are publicly traded are regulated by the SEC, allowing investors visibility into the holdings, unlike private REITs.

• Accessibility - access to commercial real estate without the high barrier to entry costs.

• Low Growth - As part of their structure, they must pay 90% of income back to investors, while 10% of taxable income can be reinvested back into the REIT to buy new holdings. As an asset class in general, real estate is stable because it does not rise or fall in value quickly, as a result growth investors are not attracted to the stock performance in the short-term. 

• Taxation - REIT dividends are taxed as regular income.

• Market Risk - REITs are subject to market risk because they are traded on public stock exchanges. The downside to the liquidity of public REITs is that this could also lower the share price in a downturn, unlike privately-owned physical real estate.

• Control - When you invest in a REIT, you do not have any control over which properties are bought, how the properties are managed, or any decisions made about those properties.