APRIL NIBJ: Barta Col: Real estate investment strategies
Raphael Barta
Owning a home is the most important component to build net worth over time. It is far more significant a contributor to financial well-being than any stock market or other investment vehicle. In addition to the emotional and psychic benefits of homeownership, the equity you are creating is tax sheltered with mortgage interest deductibility, homeowner exemption property tax policies, and capital gains shelter. This is why it is often referred to as the “American Dream.” There is a lot of media attention these days on the difficulty of realizing this Dream however, given the high cost of homes, mortgage rates, insurance coverage, and property taxes. But if you are lucky enough to own your home, and have funds you could invest in other real estate, what might you consider?
Any investment should yield two returns: cash flow and appreciation. Start with the U.S. Treasury as the basis for comparison. It is the government-backed risk free return. You can buy or sell these same-day without any transaction fees or holding costs. The mixed maturities basket (two to ten year terms) is paying 5% right now. Any other investment you could make must generate a return superior to this to account for the additional risk and expenses to hold. The next issue to consider is your investment time horizon: if you have a shorter term objective and want liquidity, then Real Estate Investment Trusts (REITs) should be evaluated. REITs own and manage commercial properties, and trade like stocks. They can be diversified across property types, or specialize in one kind of asset. Popular plays right now are REITs that focus on warehousing, cell towers, and data centers. Less popular are REITs that have significant exposure to office buildings or shopping centers. REITs must pay 90% of taxable income as dividends; any capital appreciation in the share price comes upon periodic sales of the portfolio’s properties. REITs take all the work out of owning real estate assets: the management team acquires, finances, and operates the properties, hopefully skillfully enough to generate cash to pay dividends. Returns vary widely among the hundreds of REITs, from a low of 2% to high teens. A certain amount of investment equity dictates the type of investment: with $250,000 possibly a single family rental house, with $2.5 million a small strip retail center, with $25 million, a large cold storage warehouse facility. If it’s $25,000, the REIT play allows participation in assets normally out of reach to the small investor. There are also crowdfunding sites for investment amounts that pool investor money, that are structured like limited partnerships, promoting cash flow returns plus capital appreciation.
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