Investing in REITs & Everything You Need to Know

It’s been a wild year for investors, with more uncertainty ahead. Now is a great time to learn the ins-and-outs of investing in REITS.

With the global economy destabilized and the vaccine deployed across the country for widespread distribution, investors worldwide are looking for opportunities that not only offer them a good store of value, but ideally, a steady and solid return.

Real estate is a historically high-performing investment

They need not look any further than REITs, which have consistently ranked among the highest return investments.

In fact, over the last 30 years across ten different investment classes, REITs have taken the #1 spot for highest returns eight times – more than any other asset class. For those years that they didn’t snag the #1 spot, they ranked second or third an additional six times.

This year proved to be a rough one for REITs, closing out at a net loss. But smart money knows that a down year can also be a prime entry point. After all, the goal is to buy low, sell high.

For the capitalist who sees the opportunity where others see obstacles, here’s the 360 on all things REIT.

What is a REIT?

REIT is an acronym for Real Estate Investment Trust.

In a nutshell, they are companies that pool investor capital to invest in real estate or real estate products. The gains on these investments are in turn distributed among shareholders.

REITs were defined and passed by Congress in 1960 under the Cigar Excise Tax Extension.

The idea was to give average Americans – who might not have the means to buy more than one property – the opportunity to take part in and enjoy the fairly consistent gains from real estate investments.

The act outlined requirements to qualify as a REIT under law. REITs are incentivized to meet these conditions through tax advantages. The big fish reward is that the company does not have to pay corporate taxes if they meet REIT qualifications.

REIT Qualifications

No corporation wants to pass up tax breaks. They’d rather hit these key numbers than rendezvous with the IRS come springtime:

75%

Percent of total assets invested in real estate, cash or U.S. treasuries. Also the percent requirement of revenue generated from real estate-related income such as mortgage interest rates, rent on property, or profit on real estate sales

90%

Amount of taxable income that is paid out to shareholders – a nice perk for investors, courtesy of Uncle Sam. HappyNest intends to pay out 100% of its net income to shareholders.

50%

The maximum amount of shares that can be held by 5 people or less. Coupled with this requirement is that within the first year of an REITs formation, it must have at least 100 investors in the pool.

3 Trillion

Estimated total value of assets currently held by REITs.

The Benefits Of Investing In REITs

Regular returns

Unlike many investments, investing in REITs typically produces regular income in the form of dividends generated from rent or mortgage interest payments.

Investing in REITs is accessible to the average person

While it would be great to be in a financial position to buy numerous properties and collect rent monthly, for most people, that’s simply not financially feasible.

REITs offer the ability to participate in real estate investing without having hundreds of thousands of dollars at the ready. With real estate investment apps like HappyNest, for example, investors can buy in with as little as $10.

Liquidity

Compared to traditional real estate investment property, buying into and selling out of most REITs is easier and more streamlined and requires a lot less paperwork.

Hands-free management

Ask any landlord and they’ll tell you – managing properties is a lot of work. Between filling vacancies, managing tenant requests and complaints, and building maintenance, a lot of time and money can go into the administrative side of real estate.

REITs handle the operational side of real estate investments, so investors can skip the 3 a.m. calls about plumbing issue emergencies.

REIT Taxonomy

Although it may seem difficult to understand all there is to know about investing in REITs, let’s start with the basic building blocks.

Remember in biology class when your teacher covered taxonomy trees? You know, kingdom, phylum, class, order, family, genus, species, etc.?

No? Okay, well, pay attention this time – there’s money on the line.

There are several categories…of categories…of REITs. Very meta, we know.

To make things a bit more digestible, it might help to start with a visualization, then get into the nitty-gritty.

If REITs were a taxonomy hierarchy, they’d look something like this:

REIT Taxonomy

Every REIT has a ‘class,’ ‘order,’ and ‘family’ component.

For example: American Tower Corp is a publicly-traded (class), equity-based (order) REIT that primarily manages telecommunication infrastructure sites (family) around the world.

 

Breaking Down The Taxonomy Hierarchy

Class: Investment acquisition strategy

REITs can be categorized by how they accrue capital for different forms of real estate investing.

They fall into three main categories: Publicly traded, public non-traded, and private.

Publicly traded

Publicly traded REITs trade on stock exchanges like the NYSE. Anyone can buy a slice of a real estate portfolio whenever they want.

Pros Cons
  • High degree of transparency
  • Registered with the SEC
  • Ability to generate a high amount of investment capital quickly
  • Easy to buy and sell (highly liquid)
  • Able to be grouped into ETFs. This means the value of the REIT’s share can be affected by the performance of other REITs and sectors as opposed to solely on the performance of the underlying portfolio.E.g.: If a REIT has a strong year but is grouped with low-performing REITs in ETFs, the REIT’s performance will be adversely impacted.
Public, non-traded

An REIT can be public without being traded on a stock exchange like the NYSE.

HappyNest falls into this category. Though anyone can buy shares of our portfolio of properties, the shares are not listed on the NYSE or anywhere else. We see this as an advantage – and 2020’s bottom lines back us up.

This year, the value of the properties in our portfolio appreciated. But not every sector of the real estate market was quite so lucky.

Had our REIT been publicly traded on exchanges, it’s likely it would have been grouped into other REIT ETFs. Because of this grouping, our returns would have been smaller. It’s the stock market equivalent of “guilty by association.”

Instead, our performance is tied directly to and only influenced by the appreciation of the properties in our portfolio, all of which gained this year.

Pros Cons
  • Registered with the SEC
  • Performance of investment tied to underlying asset value alone – insulated from swings in the market at large
  • Ability to quickly raise capital from investors since anyone can buy in
  • Not bought and sold as quickly (less liquid)
  • Less transparent, harder to tell share value
  • Fees
    *(HappyNest does not charge for broker commission of platform fees)
  • Information provided to the SEC may not be independently verified
Private REITs

Private REITs are not listed on exchanges and not offered to the public. As the name implies – they aren’t open to everyone.

Private REITs are not required to register with nor report to the SEC. More often than not, they are only offered to “accredited” investors, otherwise known as very wealthy people that can take the kinds of financial gambles and hits that would put the rest of us on the streets.

Though private REITs have produced higher returns than publicly traded ones, they come with significant risk. Without an SEC registration, there is little to no oversight on their performance and operations. That makes these kinds of REITs particularly susceptible to fraud.

Management fees can be high and unsubstantiated. Investors must put their full trust into the board of trustees.

Pros Cons
  • Potentially higher returns compared to traded REITs
  • Partially insulated from stock market fluctuations
  • Lack of transparency
  • Must be “accredited” investor
    *net worth of $1 million, not including primary residence or income of $200K+
  • Not registered with the SEC
  • High management fees
  • Can require long holding periods (low liquidity)

Class: Type Of Asset Managed

The ‘class,’ (in our REIT taxonomy hierarchy) is the type of real estate assets managed by that REIT. These primarily fall into two categories:

  • Equity

    An equity ‘class’ REIT owns real estate investment properties. The REIT manages, buys and sells, or collects rent from those properties.

    They generate income and profits via market appreciation of their assets. That could include things like rent payments from properties they own outright or a rent payment that exceeds their own mortgage payment on that property.

    For example: An REIT buys a property for $100,000. Their mortgage payment is $1,500 a month. They are able to rent it out for $2,000 a month. That $500, minus overhead expenses, is profit for the REIT – 90% of which must be paid back to shareholders by law.

  • Mortgage-based

    Mortgage-based REITs provide capital to borrowers much like a bank does. They generated returns via interest paid by the borrower during repayment.

Unlike the ‘order’ (investment acquisition strategy) which is either/or, asset types can be diversified within an REIT.

Two Harbors Investment Corp, for example, engages in both mortgage-backed securities as well as owns a portfolio of properties. Its income is generated by a combination of rent, asset appreciation, and interest paid on mortgages it holds.

Family: Real Estate Sectors

Lastly, within the real estate market, there are sectors.

Examples of real estate sectors include:

  • Residential
  • Commercial
  • Retail
  • Industrial
  • Healthcare facilities
  • Data centers
  • Telecommunications infrastructure

The sector in which a REIT operates can have a huge impact on the bottom line, and the performance of each sector can vary year over year.

A retrospect of 2020 demonstrates just that. As millions of workers across the world were sent to work from home, office buildings and retail storefront worldwide stood empty as leases lapsed and were not renewed.

As a result, office REIT’s year ended with a net loss of almost 20%. Around this time last year, office REIT investors were celebrating 30%+ returns.

Meanwhile, e-commerce demand skyrocketed. In May of this year, even fast shipping MVP Amazon had to remove non-essential items from its 2-day prime delivery schedules.

All that demand meant the need for shipping fulfillment centers, part of the industrial sector, increased significantly. HappyNest has an industrial property in its portfolio, currently leased by shipping logistics company FedEx, that is enjoying this appreciation.

Choosing The Right REIT For Your Investment

At the end of the day, every investor wants to protect the value of their investment and gain a little alpha along the way.

Though 2020 wasn’t the best year for REITs as a whole, some sectors thrived. Even for those that didn’t, as the old saying goes: Buy low, sell high. The dip in performance could prove to be a great entry point. REITs have historically outperformed stocks and other asset classes consistently.

Successful REIT investments are often the product of accurate predictions of what comes next.

HappyNest remains confident in its portfolio of properties’ ability to weather – and even thrive – in the upcoming year. Are you ready to start investing in REITs?

 

Download HappyNest today on App Store or Google Play.

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Top 3 Ways To Invest In Real Estate in 2020

Over the next 18 months, the vast majority of real estate investors plan to increase their allocation of capital into real estate. If you’ve made most of your investments in the past in the stock market, you may be thinking of diversifying your income through a real estate investment app. What options should you consider? Here are the top 3 ways to invest in real estate in 2020.

 

Buy A Rental Property
One of the best ways to increase your monthly cash flow is to buy a rental property. When searching for a property, do the math. Make sure the monthly rent you will receive is more than the monthly mortgage, property tax, and insurance combined. Some real estate investment apps allow you to search for properties for sale, and may even tell you the monthly rent and expenses associated with the property.

 

One drawback to buying a rental property is the upfront cost and day to day management. To ease the stress of dealing with tenants, you may want to consider hiring a property management service to oversee the rental property’s daily operations. Purchasing a rental property can be a lucrative investment for non accredited investors.

 

Flipping Houses
Flipping houses can be a risky but rewarding investment. You’ll need to hunt down bargain homes that require some work, but therein lies the upside in your investment. Once you make any necessary repairs, you can potentially resell the property for a profit. Finding a home in foreclosure may be your best bet to finding a great deal, and could cost as little as $500 down.

 

Real Estate Investment Trusts
If you’d like to take a more passive approach to real estate investing, you may want to consider Real Estate Investment Trusts (REITs). REITs are companies that own, operate, or finance real estate. Publicly traded REITs are bought and sold on exchanges. Public non-traded REITs are bought and sold through brokers or directly from the REIT itself. There are three types of REITs: equity, mortgage, and hybrid; Equity REITs own and manage properties. Mortgage REITs lend money to real estate owners and operators to purchase properties. Hybrid REITs are a combination of both. Generally, all of them offer high yields relative to other types of investments.

 

Real estate investing is an excellent way to build residual income. You can start investing today with a real estate investment app that you can easily download online. As with any investment, be sure to do your due diligence and understand the risks associated with investing.

 

Download HappyNest today on App Store or Google Play.

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Should You Consider Investing in Real Estate During Your Twenties?

Real estate investment can seem like a seasoned investors game. But the truth is that almost 79% of millennials are interested in personal real estate investments, and about 49% interested in commercial real estate investments. So why shouldn’t you start now? If you’re on the fence, here are a few reasons to consider investing in real estate during your twenties.

Lower Down Payments

The majority of banks will require an investor to put at least 20% down on a rental property. It may not seem like it, but that’s a lot of money for a property that may require significant internal and external repairs before it’s commercially viable. Fear not. Options are available for investors of multifamily properties who choose to occupy one of the apartments in the property. Banks will require only a 5% down payment for an owner-occupied property as compared to 20% down for non-owner-occupied property.
Why is this easier when you’re younger? More often than not, you’ll have the flexibility to move into a home and put the work into it than someone older with a family to factor into the equation.

You Don’t Have to Purchase Property

There are plenty of ways to invest in real estate without buying property. Real estate investment companies and real estate investing apps have made it much easier to access real estate investments. Crowdsource investing allows multiple people to invest alongside each other into a property. You don’t need hundreds of thousands of dollars. With only $500, you can start investing in property through crowdsourcing.

Technological Assistance

There’s an app for that. Literally! If you want an app for investing in real estate, it exists! With apps like HappyNest’s, real estate investing can finally enter the 21st century. And when you can access all of the information you need via an app for investing in real estate, the whole process is a lot less intimidating.
If you’re on the fence about investing in residential or commercial property, don’t wait until the opportunity passes you by. Investing in your twenties might be the best thing you ever do.

Download HappyNest today on App Store or Google Play.

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3 Ways To Create Residual Income Through Real Estate Investing

Real estate investing can be an excellent way to create passive income for investors. An average of 15% of an ultra-wealthy person’s portfolio consists of real estate investments, according to a 2017 study from UBS and Campden Wealth. How can you use real estate to create wealth for yourself? Here are three ways to create residual income through residential and commercial real estate investments.
Investment Properties
You can create income with investment properties by leasing or renting the property to others. Owning these types of investments can provide depreciation tax benefits and value appreciation in the long term. Commercial real estate investments can require a large amount of capital upfront and are often labor-intensive. You will need to manage the property, but it is common for novice investors to hire property managers rather than doing it themselves. You can find these properties by downloading a top investing app on your smartphone for free online.
Private Equity Funds
This type of investment is a collective fund consisting of cash investments made by several investors. They provide extensive diversification with different investment types. There is typically a 2% investment management fee on an annual basis and a performance fee that’s usually around 20% of the profits earned. If you are lucky enough to find an investment that seemingly explodes overnight, you can see incredibly large returns on your investment.
Real Estate Investment Trusts
Real Estate Investments Trusts (REITs) distribute 90% of taxable income to shareholders every year. REITs are either publicly traded, publicly non-traded, or private non-traded. Publicly traded REITs are made available for the purchase of shares on an open stock exchange. Non-traded REITs are available through broker-dealers or directly from the REIT itself. Non-traded REITs can provide larger dividends but often have expensive upfront fees.
These trusts can also save you money from having to manage tenants or hiring a property manager. They are also exempt from corporate taxes as long as they adhere to specific guidelines set forth by Congress. REIT dividends have the potential to increase over time, as the properties appreciate. You can find these funds by searching for apps for real estate investors on your smartphone.
Investing through a real estate investment app can be an excellent way to build residual income. It’s wise to scrutinize each type of investment before making any decisions. Fully understand the risks before putting your money on the line, and don’t forget to diversify your assets. A well-balanced portfolio will help reduce your risks and produce stable streams of income for many years to come.

 

Download HappyNest today on App Store or Google Play.

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Playing Lotto Vs. Real Estate Investing

Have you ever wondered why there are no income restrictions on who can play the lottery, but until recently, only the wealthy could invest in commercial real estate?

We’re conditioned to believe it’s a worthy investment (and even fun) to throw cash away on something with odds of 1 in 302,575,350, yet we’re restricted from accessing most real estate investing platforms that have much better odds, because of their high minimum investments. The math doesn’t add up.

The Washington Post reported that the average amount spent by each American on lotto tickets annually has doubled since 1995. There was over $72.7 billion spent on lottery tickets in 2016 which amounts to approximately $600 a year for the average American lotto player. The truth is, the lottery is little more than a tax on middle to working class people seeking a better financial future.

Slogans like “you gotta be in it to win it” and “a dollar and a dream” are created to make you think the lotto can make you rich, when in reality they’re just masking the truth that it won’t.

It’s time for us to get smart and stop paying into the system!

If that same lotto player was to invest $600 a year (or $50 a month) into private market commercial real estate, in just 10 short years, they would have accumulated approximately over $10,000! (That sounds like a lot better deal than losing $6,000, which is what most lottery players will experience.)

Perhaps the real estate investors seeking high-quality commercial real estate investments have it all figured out. You don’t have to be a real estate industry expert to experience the same results.

Our message is simple. Skip the lotto, invest in high-quality commercial real estate, and grow a nest egg. You’ll make all your lotto-playing-friends rethink their strategy too.

Now who’s in it to win it?

 

Written by Jesse Prince

Jesse Prince is the CEO and Co-Founder of HappyNest and has more than ten years of experience as a real estate investor, advisor, and financial analyst. He is a licensed real estate broker in NY and has over $500 million in real estate transactional experience. Jesse has earned a B.S. from the United States Military Academy at West Point and a Masters in Real Estate Finance from New York University, graduating with “distinction.” Jesse is proud to be a combat veteran and loves watching Army West Point win football games. Go Army! Go HappyNest!