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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Parents, It’s Your Responsibility to Teach Your Kids Financial Literacy

Parents, it’s your responsibility to teach your kids financial literacy or they’ll have to learn the hard – and expensive – way

Parents want what’s best for their kids, especially in regards to their future.

What a shame then, that one of the most highly correlated predictors of success in adulthood is one of the least talked about topics in the world of parenting – financial literacy for kids.

Financial literacy is on the decline

Financial literacy in the U.S. has been on the decline for the better part of two decades. The consequences of that have been the stuff of headlines.

The problem is likely to get worse: A study released earlier this year by the TIAA found that only 16% of Millennials qualify as financially literate.

And it costs them dearly….literally. On average, millions over the course of their lifetime.

But where there is a problem, there is an opportunity. In this case, that opportunity is that a comprehensive financial education becomes a strategic advantage in life.

After all, who wouldn’t want to give their sons and daughters a leg up over 84% of the population?

We all know things aren’t getting any easier – let alone what the future holds.

Don’t rely on school to teach kids about financial literacy

Only 21 states in the U.S. require personal finance coursework in public schools. Believe it or not, that’s actually a significant improvement from just two years ago.

Still, most requirements are minimal. A majority of states have no curriculum in financial literacy at all.

Like it or not, the reality is that the responsibility of financial literacy for kids falls squarely on their parents.

Financial education in the school of hard knocks

Most people earn their financial education the hard way: A slow, painful process in the strict and unforgiving classroom of the real world.

Lessons here come at a hefty price: deflated credit scores that haunt for seven years, debt that seems to never go down despite monthly payments (that aren’t always easy to make, especially in early adulthood), and tricky ‘offers’ that are essentially financial booby traps.

But in the depths of the convoluted fine print, most of these ‘offers’ capitalize on money management blindspots.

In recent years, the world of finance has grown even more labyrinthian – predatory even. Many products are specifically designed to exploit (and profit) from widespread gaps in financial literacy.

It’s a cruel and costly learning curve.

But parents who understand the importance of financial literacy for kids can flatten that curve. They can introduce basics on how to manage money at an early age. Then they can build on that foundation with more sophisticated concepts over time.

Financial literacy during the Wonder Years

Explaining how indexed annuities work to a 2nd grader will unsurprisingly be met with blank stares. But there’s no reason we shouldn’t expect the same from a young adult who hasn’t learned foundational concepts like investing, compound interest, and the importance of taxation timing.

Of course, not all at once. But the earlier a financial education framework is introduced, the more time the investment will have to mature.

Elementary years

As with all things in life, the basics come first and early.

That aforementioned 2nd grader probably can grasp the Bank of Mom and Dad depositing an allowance into an account.

Over time, an allowance account offers many learning opportunities on managing money – from delayed gratification (‘you can get the NERF ball now, or wait another 2 weeks to get that bike we saw’) to basic principles of fixed income.

Early adolescence

Parents can share visibility into an investment account as children enter early adolescence, such as a college savings account. That way, their preteen can see first-hand how small investments can lead to big payoffs.

Calibrate your expectations: Though they might not seem especially interested at first, once that investment grows into real money, they’ll likely change their tune.

This is also a great time to start familiarizing them with things such as personal credit scores.

High school

By the time they’re in high school, they will have witnessed what Einstein called the ‘sixth wonder of the world’: The power of compound interest.

From there, it is only a small logical step to understanding how compound interest can work against them in the context of debt.

But nothing quite beats the real thing. High school is also a time where kids start wanting big-ticket items, such as a car or a trip with friends. These wish list items can serve as the basis for the mechanics and implications of debt.

Their financial education can mature in tandem with them.

Parents bridge the classroom and the real world

What makes early exposure to financial literacy for kids so vital is the bridge it creates between the math they learn in school and how it applies in the real world.

Consider compound interest – arguably one of the most important engines in finance – is taught in 7th grade. It is not easy to recall when they’re applying for a credit card or deciding how much to contribute to their 401k.

But with first-hand experience watching an investment account grow over time, they’re more inclined to make financially savvy choices while time is on their side.

The idea is to find teachable moments along the way – life is chock full of opportunities to deepen your child’s financial literacy skills.

Financial literacy isn’t just math, it’s mindset

Understanding the numbers and math that go into financial products on the market today is an integral part of financial education. The more elusive piece of the puzzle is often the psychology around money management and growing wealth.

Financial philosophies, such as “pay yourself first” and “being poor is expensive,” aren’t taught in schools, even those that offer personal finance coursework.

But mindset, attitude, and strategy all impact wealth accumulation outcomes. Parents can help their children to see money as a tool, not a master.

Early bird gets the worm

Parents who want to see their children succeed shouldn’t rely on the school to teach them financial literacy. Instead, they have to take a proactive approach in their child’s financial education.

Perhaps the most important role a parent can play in their child’s financial literacy is helping their children bridge the conceptual to real-world application.

As with most investments, time is a variable. But kids have the benefit of time on their sides.

Early investment in financial literacy for kids ensures that when the time comes for them to fly the nest, they’ll have a little more lift under their wings.
 

Download HappyNest today on App Store or Google Play.

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Reach Your Financial Goals With a Diversified Portfolio

 

It’s fair to say that deciding where to start or what to do can feel overwhelming with all the investment options out there. Just listen to CNBC, Fox Business, or Bloomberg any day of the week, and you’ll hear dozens of opinions about where to invest your money. “Buy stocks,” “buy bonds,” “buy gold!” “sell Bitcoin!” “buy real estate,” the options feel endless. On the surface, the advice can be confusing and, at times, contradictory. Still, if you take a step back, you realize they are all hinting at one fundamental piece of advice: diversify your portfolio.

What exactly is diversification?

Simply put, it’s the process of spreading your investments across multiple industries and asset classes. You’ve probably heard the saying, “don’t put all of your eggs in one basket,” as it turns out, this applies, quite literally, to your investment portfolio.

To better understand diversification’s benefits, you must first understand modern portfolio theory (MPT) and correlation. MPT argues that an investment should be evaluated on how it affects an overall portfolio’s risk and return. This is important because the risk and return profile of one investment can influence an entire portfolio. When you have a diversified portfolio, you will have assets with varying levels of risks, returns, variances, and correlations.

As for correlation, it’s the degree of a relationship between two assets. For example, if two assets are perfectly correlated (correlation equals 1), when one asset price goes up, the other asset increases at the same value, and vice-versa. A well-diversified portfolio includes assets with low correlation preventing the entire portfolio value from collapsing in bad times.

So, what does a diversified portfolio look like? It includes a mix of real estate, stocks, bonds, and even some Treasuries. All these assets have varying risks, returns, and correlations with one another. For example, Treasuries and bonds generally have lower returns than stocks and real estate but can be a good source of steady income. These are your portfolio’s lower-risk portfolio stabilizers. Real estate and stocks can provide more significant long-term returns but increase the overall portfolio risk. These assets are your portfolio’s growth engine.

Additionally, according to PREA.org research, real estate and stocks have a low correlation of 0.07, and real estate has a -0.15 correlation with bonds. By investing in all three of these types of assets, your portfolio return is resilient from events that may affect real estate or stocks exclusively. A great example of why this is important is the 2008 Great Recession and the stock market drop in early 2020. Private market real estate did not necessarily lose its value even when stocks declined sharply. In fact, as bond values took a hit during this same period, private market real estate (multifamily, single-family, industrial, and logistics) increased in value. The private market real estate, in this case, stabilized the portfolio value for long enough to allow an investor to maintain their ownership in stocks, which of course, returned to near all-time highs as of the publishing of this article.

In short, a diversified portfolio helps mitigate the effects of unfavorable market fluctuations while still allowing you to take advantage of the bull market runs. At the end of the day, it’s important to find the right balance of assets for your risk tolerance. Creating a well-diversified portfolio can help you hit your financial goals faster!
 

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How to Generate Passive Income by Investing in Real Estate

We all know that it’s wise to put in the effort to create multiple streams of income rather than depending on a single stream of income to fund your life. After all, you never know when one job or income source might fizzle out, leaving you high and dry with not even a moment’s notice. For this reason, it’s essential to understand the basics of creating passive income for yourself.

One of the best ways to generate passive income is by investing in real estate. Were you aware that residential real estate as an asset class is a $29 trillion market, and the commercial sector adds another $10 trillion? If you’re new to the world of investing or real estate (or both), you’re probably wondering how you can make the most of this opportunity. Here’s how you can get started on generating passive income by investing in real estate.

Do Your Research First

Just as you wouldn’t rush into investing in some business or company without first understanding them, you should never rush into real estate investing without first doing your research. First and foremost, learn everything you can about the target market. What is the average sale price of a variety of properties in the area you’re considering for investments? What kind of extenuating data relating to the local economy, workforce, and population might impact real estate value? Understanding the market will give you a leg up on the competition, ensuring your success in growing your passive income and cash flow.

What is passive income? Simply put, passive income is any source of income that earns money for you while you sleep. In other words, passive income puts money in your wallet over time without you having to log hours for it. Of course, most passive income, including that earned from investing in real estate, take some work upfront. But once things the foundation is set, you can sit back and collect your money every month.

Whether you’re looking to make use of one of the top investing apps such as HappyNest to invest in commercial property, or invest in a residential property, you should set a realistic goal and be prepared to do some work to get started.

Create a Goal and Vision for Yourself

Even if you’re armed with the best apps for investors, you won’t get far without the right mindset. It would help if you considered your reasons for investing before diving too deep into the specifics. Do you have a goal in mind that’s related to financial independence for you or your family? Are you just looking to create extra income to put towards a large purchase in the future? Answering these kinds of questions for yourself can give you a much clearer mental roadmap of where you are and where you want to be with your investments.

Make Use of New Technology For Easy Investing

Finally, it’s helpful to know that new technology has made investing more accessible. With real estate investing apps like HappyNest, you can get started right away without much money upfront. Real estate investing apps allow you to adjust investments on the fly. You can also access your portfolio from the comfort of your smartphone. Making use of such technologies makes investing easy and convenient.

Generating passive income by getting started in investing in real estate represents an excellent opportunity for new and experienced investors alike. Even if you’re not entirely comfortable with the process, we hope this helped shed light on some of the most basic steps to real estate investing.

If you’re wondering how you can make use of the HappyNest to fund your dreams, or if you’re looking for some more information on what HappyNest does and how we can help you, then please don’t hesitate to reach out and get in touch with a member of our team. We can’t wait to help you start earning passive income by using the HappyNest app to invest in real estate!

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