REAL ESTATE
REITS
As discussed in Chapter x of our publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), and several additional blogs, the purchase of a home may be one of the biggest decisions, and investments, to make in one’s lifetime. Over the last few years, it has never been more difficult for young buyers, with rising inflation, property prices, and property taxes/insurance. Commercial real estate has seen its own crisis as well, highly affecting small businesses with office vacancy and plunging values, and Air BnB’s have become a regulatory nightmare. The situation appears to be only getting worse, with an increasing number of defaults and loans coming due.
As a result, many investors have turned away from physical real estate investments that come with maintenance upkeep, tenant issues (including rent “freezes and eviction blocks), regulatory changes, and rising property taxes. One form of alternative passive investment is the Real Estate Investment Trusts, also known as REITS.
REITS are companies that own, operate, or finance real estate to produce income. They include many types of properties, including apartment building, commercial businesses, hotels, medical facilities, and more. These entities basically buy or develop properties and then rent them out directly for income, or finance the property to collect interest for income.
Advantages of REITS include the fact that it includes the “ownership” of real estate without the headaches of maintenance, renters, property taxes, and equipment and systems regulations. Also, these instruments are traded the same as stocks/ETFs, and provide an easy in or out of the investment with a simple click of a button. They also tend to pay much higher dividends than the industry standard. Though any company can reduce their dividends at any time, REITS are legally required (by the government) to distribute 90% of their taxable income to shareholders in the form of a dividend, and much less likely to do so.
Some disadvantages, or risks, regarding REITS includes the fact that since they are only able to keep 10% of their net revenue, they may engage in over-leveraging their portfolio with additional property purchases. They are also interest rate sensitive, and subject to decline in price in inflationary or recessionary conditions. Another risk is anytime there is a decrease in property values or demand, certain types of REITS may lose value.
For instance, during the pandemic in 2020-2021, many office buildings decline or dissolved due to the surge in “work from home” individuals, causing a large drop in office space demand. In addition, rent “freezes” and eviction blocks had a negative effect on apartment buildings and multi-family homes, as landlords were still liable for their mortgage payments.
One should always conduct due diligence with any investment including REITS. When considering this instrument, check their balance sheet to ensure they are not over-leveraged, have a consistent history of dividends, and are growing as a company. Also consider current economic conditions, including interest rate levels, to prevent purchasing at the wrong time. In the past few years many REITS have struggled with their stock price due to the rise in interest rates. Very recently, however, they have started to recover with the perception of lower rates coming soon, and the timing may be improving for this type of investment.
Please visit the website www.augustassociatesllc.com for home values, listings, and professional assistance.
***As always, this information is not intended to be financial advice, or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of current economic conditions.
