Why Invest In Real Estate?
Changes in tax laws over the years have not changed the fundamental premise that real estate is a sound investment. In fact, real estate has historically outperformed many other investments of comparable risks and will remain an important addition to any investment portfolio. The universally suggested allocation, or segment of one’s portfolio is 15 to 20 percent. By adding a real estate segment, several benefits can be realized. First, real estate has a low to negative correlation compared to the performance of stocks and bonds, therefore, potentially mitigating portfolio risk through added diversification and adding a very competitive risk-adjusted return. Secondly, real estate has performed historically well when measured against major indices such as the S&P, DJIA, and bonds. Thirdly, real estate provides a strong potential hedge against inflation.
By simply tracking real estate performance for the past 20 years, three facts are important to consider:
Real estate has slightly outperformed the S&P;
The dividend has significantly outperformed the S&P;
The risk-adjusted return was significantly greater when one factors real estate’s correlation and risk-adjusted returns to other investments.
Why Invest In A Real Estate Investment Trust?
Understanding A REIT
A REIT (Real Estate Investment Trust) utilizes the capital invested by many shareholders to acquire real estate. In most cases, NetREIT prefers income-producing real estate comprised of office buildings, shopping centers, storage facilities, and apartment complexes. One of the most beneficial aspects of owning a REIT is that corporations or trusts which operate as a REIT typically do not pay federal corporate income tax to the IRS. However, in order to continue to qualify for that special tax status, the REIT must distribute 90% of its taxable income to its shareholders. The income can be distributed without double taxation – that is, taxed at both the corporate and shareholder levels.
Clarifying A REIT
REITs typically are made available in two forms: traded and non-traded. Traded REITs trade on a stock exchange and the share price can change daily depending on market perception and activity.
Non-traded REITs do not trade on an exchange; therefore, price remains constant. Once the acquisitions of real estate holdings are complete, the REIT may then seek exposure on a major stock exchange by means of an Initial Public Offering (IPO). At the successful completion of the IPO, the REIT is deemed to be publicly traded and begins trading on a stock exchange. From that point forward, its price can change daily.
Benefiting From A REIT
By adding real estate to one’s investment portfolio by means of investing in a REIT, several advantages are realized:
- Portfolio balance is achieved by adding an asset class which has little correlation to the stock market.
- Confidence is gained by knowing real estate is used by many large institutional investors.
- Diversity, which adds a measure of safety, is added through many different property types.
- The opportunity to receive income through dividend distributions created by real estate operations.
- Capital appreciation potential from increased real estate values.
- Non-Traded REITs
As noted above, a REIT which is considered private, or non-traded, and does not, therefore, trade on a public stock exchange, is typically considered an illiquid investment. It will remain illiquid until the objectives of the REIT have been achieved. At that point, the REIT may go public and begin trading on an exchange, or it may be liquidated—that is, the properties are sold and the proceeds returned to the investors.
Advantages Of A NON-TRADED REIT:
- Helps eliminate the temptation to make frequent, hasty, or rash decisions.
- Avoids the unpredictability and changeability of the publicly traded investment marketplace.
- Reduces unnecessary transaction costs.
- Infinite Life For Maximum Opportunity
With an infinite life provision, NetREIT can buy or sell properties when the market is best…not within specific time constraints. Additionally, infinite life REITs by definition are less sensitive to market conditions.
Maintaining A High Equity Position To Maximize Cash Flow
NetREIT has established an objective of utilizing leverage when it can best be used to enhance real estate acquisitions and increase the number of properties to acquire. The use of leverage can be a powerful catalyst in building a successful real estate portfolio. However, using leverage wisely and maintaining a proper equity balance can result in maintaining a reasonable cash flow to shareholders. Cash flow plus capital appreciation equals an extremely competitive total return on investment.
The Tax Advantage
Regular Income and Shelter:
Income from the Trust, unlike many other investment funds, may not be fully taxable. A portion of the dividends distributed may not be taxed as ordinary income. In addition, the Trust should not generate any income subject to the unrelated business tax, UBTI.
Liquidity & Dividends
Traditionally, real estate ownership requires a long-term capital commitment—typically five to seven years or possibly more. However, during this period, NetREIT intends to pay quarterly dividends to its shareholders. If possible, the board may declare stock dividends as well.