In today’s fast-paced and ever-changing world, real estate has always been a cornerstone of investment for many individuals. With the advent of new technologies and innovative business models, the landscape of real estate investing is rapidly evolving. In this exclusive interview, we sit down with Jesse Prince, the CEO of HappyNest, a groundbreaking platform that is revolutionizing the commercial real estate investment industry. Jesse shares his vision for the future of real estate investing and how HappyNest is paving the way.
Jesse has always been passionate about real estate investing. With a background in finance, a master’s in real estate from NYU, and years of experience in the industry, he noticed a significant gap in the market – a lack of accessible, user-friendly platforms for everyday investors. Driven by his passion for real estate and a desire to democratize the investment process, he founded HappyNest, a platform that makes investing in real estate as easy as investing in stocks.
What is HappyNest?
“HappyNest is a fintech startup that offers commercial real estate investment opportunities to retail investors, with a focus on millennials and Gen Z. The platform allows users to invest in real estate funds with as little as $10 and offers unique features like a round-up program that lets users invest their daily transaction round-ups into shares of the fund. HappyNest’s mission is to make real estate investment accessible and inclusive for all while providing a seamless and user-friendly investment experience,” says Prince.
Historically, commercial real estate investments were only accessible to those who could afford to purchase properties independently. Traditional real estate investments necessitate a down payment or a significant lump sum, making it difficult for young or new investors to enter the market. However, commercial real estate assets have outperformed the stock market for decades. HappyNest provides a solution to this problem by offering investors an opportunity to access this lucrative market. As a shareholder, you become a partial landlord of these exceptional assets, and you will receive quarterly dividends from rental income. Furthermore, shareholders will benefit from any increase in value our properties experience.
The future of commercial real estate investing
According to Jesse, “The future of real estate investing lies in making the process more accessible and empowering individual investors.” He envisions a world where technology and data-driven insights enable investors to make well-informed decisions about their investments. In this future, barriers to entry will be significantly reduced, allowing people from all walks of life to participate in real estate investing and build wealth.
Jesse also believes that sustainability and social impact will play a crucial role in the future of real estate. As the industry evolves, he sees a greater emphasis on environmentally friendly and socially responsible investment opportunities. HappyNest is already working towards this vision by carefully selecting properties that adhere to high sustainability standards and support community development initiatives.
How does HappyNest help me become a commercial real estate investor?
With HappyNest, you can become a real estate investor with a low buy-in amount of just $10. It is one of the lowest minimum investments of any real estate investing platform on the market.
HappyNest’s investment portfolio consists of a diverse range of real estate assets, including net leased retail to national tenants, mixed-use properties, multi-family developments, real estate lending funds, logistics facilities, and properties leased to tenants in the cannabis industry. The investments are located across the United States, with a focus on strong logistics locations, growing populations, and thriving industry sectors.
HappyNest’s investment strategy seeks to provide principal protection while achieving attractive returns through a variety of strategies, including property value growth, rent growth, and effective asset management. HappyNest’s recent sale of a CVS property with a 15% IRR in just over two years is a testament to the effectiveness of its investment strategy. Overall, HappyNest’s portfolio offers a unique and well-rounded investment opportunity for those seeking low volatility returns, current income, and downside principal protection in the real estate industry.
Our easy-to-read blog provides useful explanations of investment strategies, allowing users to invest in premier commercial real estate for just a few dollars at a time.
How to get started investing in commercial real estate with HappyNest
HappyNest is undoubtedly at the forefront of the future of real estate investing. With its innovative platform, dedication to accessibility, and commitment to sustainability and social impact, the company is poised to make a lasting impact on the industry. Download our app and start your journey to financial success. Set realistic savings goals, choose the amount you want to invest, and start growing your nest egg.
When tax season rolls around, REITs send shareholders a 1099-DIV form summarizing the growth of the principal investment as well as the cumulative dividend payouts for that tax year.
In most cases, REIT investors simply need to input the information from the 1099-DIV form into TurboTax, H&R Block, FreeTaxUSA, or other preferred self-filing software.
With the exception of the 1099-DIV form, REITs generally do not require any additional paperwork.
In the eyes of the IRS, there are two components to REIT taxation:
Dividends
Capital gains or losses (resulting from the sale of an REIT stake)
Here, we’ll break down how they are handled and what variables impact taxation rates.
On the backend: REITs and corporate tax
REITs are granted favorable tax status if they meet the following conditions:
90% of their income is distributed to shareholders in the form of dividend payments
75% of income is generated from real estate activities
In return, they are considered “pass through” corporations (like LLCs and S-corporations) and exempt from paying corporate taxes.
Consider that other types of dividend distributions, like those that come from profit-sharing stocks, are first taxed at the corporate level.
This bodes well for REIT shareholders – there’s more pie to go around.
REIT dividend distribution taxation
However, that pie isn’t getting off scot free. Though they weren’t taxed on the corporate level, they are taxed on the individual (shareholder) level.
REIT dividend distributions fall into one of three taxation buckets:
Ordinary income, marginal rate
Long-term capital gains
Return on capital
Here, we’ll go over each category and how to know where your 2020 REIT dividend payments fall.
Ordinary income
The U.S. tax code classifies dividend distributions of any variety as either ‘qualified’ or ‘ordinary.’
Because the investor receives the untaxed REIT payment, dividend distributions are considered ‘ordinary’ or ‘non-qualified.’
In the majority of cases, REIT dividend distributions are categorized as ordinary income – the same bucket as the salary your employer pays you, bonuses,
commissions, tips, income from your own business, etc.
In 2017, Congress passed the Tax Cuts and Jobs Act, which included an advantageous tax perk for REIT investors.
REIT dividend distributions were granted a 20% deduction, which lowers the taxable amount.
For example: If an investor received $10,000 in REIT dividend distributions in 2020, only $8,000 of it is added to their taxable income for the year.
Ultimately, the rate of taxation of your REIT distributions will depend on your total income for that tax year. That figure is subject to the federal government’s progressive income taxation rate, outlined in the table below.
2021 Federal Income Tax Brackets
Rate
Single Individuals
Married Individuals Filing Joint Returns
Heads of Household
10%
Up to $9,950
Up to $19,990
Up to $14,200
12%
$9,951 to $40,525
$19,901 to $81,050
$14,201 to $54,200
22%
$40,526 to $86,375
$81,051 to $172,250
$54,201 to $86,350
24%
$86,376 to $164,925
$172,251 to $329,850
$86,351 to $164,900
32%
$164,926 to $209,425
$329,851 to $418,850
$164,901 to $209,400
35%
$209,426 to $523,600
$418,851 to $628,300
$209,401 to $523,600
37%
$523,601
$628,301+
$523,601
The tax rate of your dividend distributions will depend on your total net income for that calendar year.
Long-term capital gains
While the majority of REIT income is taxed as ordinary income tax, some of the dividend distributions may instead be subject to a capital gains tax.
In most cases, capital gains tax rates are preferable to income tax rates because they are usually lower.
Dividend distributions that qualify for the preferred capital gains tax are the product of incidental events.
Most commonly, it is income generated from the sale of a property in the REIT’s portfolio that is in turn distributed to shareholders> The only condition for the proceeds from a sale to qualify for long-term capital gains tax is that it must have been held in REIT’s portfolio for at least a year.
Not to worry – the 1099-DIV form will parse out how much of your total distributions will be subject to ordinary income tax (Box 1) versus capital gains tax (Box 2).
Return of capital
Lastly, a portion of your total REIT distribution income may be classified as ‘return of capital,’ which you will find in Box 3 of your 1099-DIV document.
The good news is that any funds that fall into Box 3 are tax free (woo hoo!) – for now.
In short, the REIT is returning a portion of investors’ principal investment.
Because you already shelled out taxes on your initial investment, you won’t need to pay taxes again when that capital is returned to you.
However, return on capital income could have tax implications downstream.
When the REIT returns a piece of your original investment in the form of distributions, you aren’t selling your shares in the REIT.
Instead, your cost-per-share is reduced.
For example:
You bought 100 shares of HappyNest’s REIT at $100 per share.
In a dividend distribution, HappyNest distributes $5 per share return on capital.
You would see $500 ($5 x 100 shares) in Box 3 of your 1099-DIV
After, your cost per HappyNest share is $95.
A few years from now, you sell your HappyNest holdings at $200 dollars per share.
Because of that $5 return of capital distribution, your profit on the sale would be $105 dollars per share ($200-$95=$105).
The profit from the sale of REIT shares is subject to taxes in the year of their sale.
Reinvested dividend taxation
If you are reinvesting your REIT dividend distribution, the distribution is still considered taxable income.
Principal investment taxation
As far as your core investment, no tax applies while it remains invested in the REIT.
It only has tax implications if you sell your stake.
If you liquidated out of a REIT stake this year (i.e., sold you shares), there are a few more tax considerations.
If the shares you sold gained value while you were holding them, the profits (sale value – principal investment) are taxable.
The rate of taxation depends on how long you held your REIT stake.
Short-term capital gains tax
If you held the shares for less than a year, then any profits from the sale should be considered ordinary income and will be based on your income tax bracket.
Long-term capital gains tax
There is a tax incentive to hold your REIT investment for at least a year.
If you do, any profits from the sale of your shares will be subject to the long-term capital gains tax, which is generally lower than income tax rates.
2021 capital gain tax rates
Taxation %
Income
0%
$0–$40,400
15%
$40,401–$444,849
20%
$445,850
Capital losses
2020 proved to be a difficult year for certain sectors of the real estate market, especially the commercial office and retail sectors.
That means investors may have sold out of their REIT stake at a loss. Filers can subtract up to $3,000 worth of capital losses from their taxable income per year.
However, $3,000 is the maximum capital loss deduction allowed per year against your total earned income. Losses that exceed $3,000 can be deducted from future tax filings.
A lucrative investment
Taxes might not be great dinner conversation, but they are the tail-side of the wealth-growing coin.
Tax efficiency can have big implications on your bottom line. Working with a tax professional to better understand how taxes work can further your financial education and optimize your tax bill.
And there’s no better investment than that of your financial knowledge.
Hey, teacher – leave those kids alone. Or at the very least, maybe teach them something that will be useful in the real world? Financial hacks to keep them out of a lifetime of living paycheck to paycheck and debt might be a good place to start.
Source: National Financial Educators Council
One thing an overwhelming amount of Americans agree on is that financial literacy should be taught in schools.
A hard majority – 85% according to a recent study by National Financial Educators Council – think so.
Surprisingly, despite this widespread agreement, personal finance coursework is only required in less than half of states.
It’s puzzling, isn’t it? You would think that budgeting, understanding the true costs of loans and interest rates, and real wealth-building strategies might generate more productive, law-abiding, tax-paying members of society. And that’s the goal…isn’t it?
Whatever the backstory on that mystery, the bottom line is that many of us were never properly taught how capital works. To cover some of that lost ground, we’re sharing some financial hacks that can help you get off the paycheck-to-paycheck treadmill.
So if you want to do your homework on real-world financial hacks, this in-depth lesson will get you in the right mindset.
You put in the work, you should get the reward. Everything else is secondary – period.
One of the most common mistakes people make when they get their paycheck is getting squared up on bills, rent, loans, etc. first. They then try to get to their next paycheck on whatever’s left over.
Sure, it seems like the responsible thing to do. But with this approach, the check that takes two weeks (or whatever payout cycle you’re on) to earn is spent within hours of hitting your bank account. By the time the next paycheck rolls around, it can’t come soon enough. The goal of saving and investing gets put off once more.
Not anymore. From now on, the first line item on your paycheck to-do list is paying yourself. This is the single most important wealth building financial hack.
Your nest egg is now priority number one. If your goal is to save $250 per paycheck, then the first withdrawal from your paycheck should be $250 for your nest egg.
Feeding two birds with one scone: This nest egg account should have some safeguards in place to prevent you from tapping it too easily. For example, a savings account is not an ideal nest. Not only because saving account interest rates are a joke and inflation is eroding the purchasing power of your money while in one, but also because it’s just a little too easy to dip into.
Keeping it in stocks, bonds, REITs, or other alternative investments makes them less liquid. Having to process a transaction and wait for the transfer builds in some natural friction to curtail dip slips. (Hey, it happens to the best of us).
Financial hack 2: Automate your nest building with robo investing
In fact, paying yourself first is so important, you may want to take some extra precautions to eliminate room for human error. Enter: Robo deductions. What a time to be alive.
If your bills are set up on auto-draft, no reason why your nest building shouldn’t be, too. Set up a monthly automatic deduction that goes straight into your net worth.
If the insurance company and your landlord get their cut of your paycheck, your long-term portfolio value deserves an auto-draft too.
HappyNest offers monthly deductions from your funding account and redirects the funds into your investment account.
Financial hack 3: Cut the zombie subscriptions and redirect funds into your nest egg
Ever get notices that a magazine subscription you’ve been meaning to cancel for 10 months just renewed? Or that a video editing app you downloaded one time to cut out that would-be career-ruining contraband that rendered an otherwise hilarious video unpostable over a year ago and never bothered to cancel?
As life itself moves to an increasingly subscription-based model, be sure to do a scrub of memberships and auto-renewals. These sneaky expenses can really pile up over time. All those those “try it for free” sign-up forms or free trails are fully counting on you to forget about them where they can quietly drain your portfolio undetected. Too much weight makes the boat go slow.
To implement this financial hack, review your bank and centralized payment accounts such as PayPal or ApplyPay. These central payment stations offer the best birds’-eye view of auto nest killers.
Better yet, cut a few dead-weight subscriptions and tally the total monthly savings. Then, redirect that draft amount into an investment account for nest building. This action has a net impact of zero on your day-to-day spending.
Be sure to check in on your subs at least twice a year. Take the time to comb through for annual renewals too – those sneaky scoundrels will creep up out of no where with a hefty draft that leaves you feeling violated.
Beat them to the punch.
Financial hack 4: Sleep on it before you buy it
The internet is a fluid place, and one thing can rapidly lead to another. Next thing you know, your out a few hundred bucks on some impulse buys that sounded life-changing at the time but just lead to more clutter in your pad.
It can be hard to fight the “you deserve it” devil on your shoulder on a late-night treat yourself. The truth is, you do deserve it, and heaven knows we all need a little self-love and care. We all do it – there’s no judgment here.
The best tool in your financial hacks toolbox for separating the quality “treat yoselfs” from the empty depths of mindless consumerism is to sleep on it.
If you really do deserve it – and you probably do – you’ll still deserve it in the morning.
All the glory, none of the guilt.
Financial hack 5: Get your children’s financial beaks wet early
Can you imagine how much money you would have saved if you had been properly taught about managing finances? You know, the things you learned the hard way – whether that means cleaning up a bad credit score, climbing your way out of student debt (not terribly unlike climbing out of the pit in Buffalo Bill’s basement), or even the helpful things you learned on your own time via late-night YouTube binges of Rich Dad, Poor Dad videos? You can give your kids a head start by teaching them what you learned in the school of hard knocks.
Before they swan dive into the real world, give them some floaties. But if you just can’t get around to it, maybe the collections agent will be interested to hear about the Alamo, which was, of course, covered extensively in the classroom.
Spare your kids the same fate.
Feeding two birds with one scone: Because we all know someone’s got to pay their way for the first round of the world slapping them up with late fees and the joys of collection accounts. Odds are, as their parents, you’ll have to bail them out of at least one or two of these financial boobie traps. That makes investing in your child’s financial literacy early on a win-win for both of your nest eggs.
Building up your financial literacy is a years-long journey. These five financial hacks are good starting points to get the ball rolling.
The king of e-commerce has partnered with Salesforce CEO Marc Benioff in the Space Race. There is formidable competition. Virgin Galactic founder Richard Branson, already a legend in air travel, has his own space ambitions, as does Tesla Founder and CEO, Elon Musk.
But back at mission control, Bezos is moving in on a neighborhood near you.
Fintech enters the housing market
Arrived Homes is the latest fintech app that aims to remove obstacles between individual investors and wealth-building opportunities.
At first glance, Arrived Homes seems like it’s lowering the barrier of entry to the real estate market. This will ring like a siren call to Millennials and Gen Z, already significantly behind where the Boomers were at this stage in their lives by measure of property ownership.
But things aren’t always what they seem. Peeling back just one layer reveals that Arrived Homes could lock Millennials and Gen Z out of homeownership for good.
Moving the goalposts
The cost of housing in the United States is primarily a function of supply and demand. As Millennials pay off student loans and negotiate salaries that resemble progress on paper, the cost of homes is always one step ahead. The price tag is always increasing a little faster, always just out of reach.
Data source: FRED St. Louis
Raises and promotions never seem to keep pace with the rising cost of living, creating a confusing life conundrum that has resulted in postponement of marriage and a free fall in birth rates.
Millennials are now in their late 20s and their 30s, and Gen Z is on the shores of adulthood. Both cohorts rightfully want their share of the proverbial pie.
Supply and demand, demand, demand
The pandemic brought on a Millennial wave of Urban Flight, as lockdowns made city dwellers realize just how small their living spaces really were. The influx of buyers in the already-tight liquidity market has led to home sales closing over asking prices by double digit percentages. According to Redfin, 70% of buyers faced bidding wars in May of 2021 – up from 52% of buyers in May 2020.
Source: Redfin
Juxtapose that against a market whose supply stock has been stunted by city ordinances and permits, largely reserved for large developers with deep pockets. Not-so coincidently, those same developers also happen to be the benefactors of the housing subscription model.
Another sneaky force adding pressure in the mix is the rise of AirBnB. The short-term rental app took even more housing chips off the table. Its platform further incentivized the mindset that houses are investment assets to capitalize on – not homes that people need to live in.
These pressurized dynamics were already driving double digit ‘appreciation’ in real estate. According to a June S&P Global report, the U.S. housing market gained 14.6% in value year over year between April 2020–2021. At time of press, that trend is showing no sign of slowing.
Changing lenses
The real estate market’s ‘appreciation’ percentage gain is one way to present the fact that renting Millennials and Gen Z are now 14.6% further behind the American Dream, which for our intents and purposes here, starts with owning a home. It also loosely translates to “rent is probably going up soon.”
That makes for two demand-side pressures contributing to the price increase in the housing market, while the supply side has remained stagnant. How will we solve this problem?
One solution that definitely won’t work: Jeff Bezos’ latest project, Arrived Homes. Presumably, it’s about to throw gasoline on an already overheated market.
Jeff Bezos is a man of profound talents. But great talent can be applied to bad visions with harmful ramifications. Indeed, misguided ambition can amplify the fallout of a small-context vision.
American Dream for sale
Arrived Homes will accelerate the transformation of the American Dream into an ‘investment class’ that appreciates. That’s a big change from its place as a milestone of “making it,” and symbolism of freedom and independence.
The housing market’s assetization is reminiscent of the successful conversion of higher education into an investment, which learned everything it knew from the capitalization of health care.
Arrived Homes creates an access point for investment capital to flow into the pressure cooker that is the American housing market. It creates more demand without a corresponding supply expansion. You don’t need a finance degree to understand that when demand exceeds supply, prices will continue their exponential climb.
Getting buy in
As material wealth continues to consolidate into fewer hands, young adults will continue to find themselves in perpetual debt without ever owning anything.
Still from World Economic forum YouTube channel for editorial commentary purposes
In fact, the World Economic Forum came right out with recommendations to get comfortable with the idea of perpetual serfdom. What a message. But don’t worry: We’ll be happy. The economists at the World Economic Forum, who are much smarter than us, said so. Apparently, their cum laude is supposed to mean we’ll believe anything they say is true.
Intentionally or not, Arrived Homes deceptively positions itself as granting access to a market that it is actually shutting people out of. Americans don’t need partial ownership in rental properties: They need a primary residence. The number of renters officially eclipsed the number of homeowners in 2018, and the divide has been growing ever since.
The math isn’t hard: Every property added to Arrived Homes’ portfolio is one house’s status going from owned to rented.
Collective commercial real estate investing
But it doesn’t have to be this way. HappyNest is a collective investing, real estate fintech app that, first of all, arrived to the market before Arrived Homes did. Our platform gives real people access to a market they never could realistically consider – the literal inverse dynamic that Arrive Homes creates.
HappyNest seeks to help people grow their primary nest egg, by opening doors to wealth-generation opportunities without slamming the doors on other future prospects. That’s because HappyNest’s investment portfolio consists of commercial and industrial properties, a lucrative asset class that has historically only been available to the wealthy and connected.
But by pooling capital from real people, we can cultivate access to possibilities we couldn’t accomplish individually. By teaming up with HappyNest, investors aren’t indirectly driving up living costs and minimizing their homeownership prospects in the future.
Jeff Bezos’ next move
Wouldn’t it be wonderful if Jeff Bezos instead applied his incredible gifts and talents to something that enriched communities, not just board members? The man has the world at his fingertips – any further personal wealth accumulation at the expense of others is no longer ethically justifiable by ambition alone. It’s hard to imagine there would be a tremendous change in his living standard compared to what he’s established after his first few hundred billion.
We already know Jeff Bezos can accomplish whatever he sets his mind to, for better or for worse. Who will be impressed if he makes another successful business? At this point, it’d be more surprising if he didn’t. Any more wins in this arena are expected – boring, even.
Dramatic Crossroads Yu-Gi-Oh Card by AlanMac95 on DeviantArt
Perhaps Bezos should consider expanding his definition of value and worth. He could challenge himself to look beyond dollars, patents, property, and copyrights. He could focus on drawing up the blueprint for more conscious capitalism – one that is focused on ‘win-win’ as opposed to ‘win-more.’
Can Bezos sell the vision of a cleaner, more equitable world? Could he work out the operational inefficiencies in energy production and consumption? Can he set up the infrastructure for every American to get quality health care with Prime-level speed? How about cut the cost of lifesaving products like insulin while still maintaining enough margin to support a healthy business?
Can he change gears now, from building an empire, to investing in a legacy?
We hope we live to see it. If Jeff Bezos were to pursue a venture like that – we’d buy the first share.
Thinking two steps ahead
But with this next venture – Arrived Homes – the answer appears to be ‘not for now’.
Perhaps the allure of becoming the world’s first trillionaire is something he simply cannot resist. It almost seems that the biggest weakness of the world’s most successful man is one most of us can relate to in some way or another – our own egos.
Once he’s conquered the real estate market to his liking, he might still have time to achieve his greatest feat yet – merging aptitude with empathy, while Millennials and Generation Z sort through the damage his monumental success has inflicted upon their lives.
Until then, we invite you to think not just one, but two steps ahead in your investing journey. Together, we can get our share of the American Dream, too.
Despite the wild ride investors of all kinds have been on this year, their portfolios were almost certainly hit with volatility.
Change is afoot; uncertainty lingers.
Long-standing investment wisdom holds that markets do not like uncertainty.
The best we can do to manage risk under murky conditions is minimize the variables that contribute to volatility.
But after an IPO, publicly traded REITs become subject to numerous irrelevant or amplifying market factors that do quite the opposite. Many of those dynamics have little to do with the performance of the REIT’s portfolio value or management.
Here are three reasons why private REITs are an attractive alternative investment to hedge your portfolio against volatility.
They aren’t in ETFs
A well-run, private REIT’s share price is a truer reflection of value than many publicly traded investments.
Consider this: According to ETFGI, an independent market research and consulting firm, the number of publicly traded ETFs has gone up more than seventeen-fold since 2005.
At the same time, the number of companies listed on the stock market has been on the decline.
The result? The stock price of publicly traded securities is becoming increasingly tied with the performance of the overall U.S. economy – and less reflective of the underlying assets performance.
The value of the investment asset is now intrinsically tied to the performance of all thecompanies in the fund. That may include competitors or even completely unrelated industries.
There are 20 publicly traded ETFs that are combinations of various REITs.
If one asset in the ETF dives, the value of all assets take a hit. The more ETF exposure, the more amplified the influence of groupings becomes on share value.
You know what they say: The company you keep.
HappyNest’s portfolio
By contrast, a private REIT’s share value is primarily a function of real estate appreciation and property management performance.
That has proven to be a blessing for HappyNest’s portfolio.
The tides of the last 12–18 months have hit various real estate sectors asymmetrically.
Some sectors thrived: The demand for industrial properties, such as HappyNest’s shipping fulfillment center in Fremont, IN, grew substantially as major retailers dialed up their e-commerce capacity.
Meanwhile, large sections of the workforce were sent to work from home. Skyscrapers and office buildings across the country became ghost towns.
How quickly the demand for office space and other hard-hit sectors will rebound remains to be seen.
Had HappyNest been grouped with an office space REIT in an ETF, its share value would have been impacted by office sector decline. That is despite the fact that HappyNest has no office space real estate in its portfolio.
They aren’t shortable
Speaking of market forces that distort true value: Recent activity in GameStop’s stock price revealed that many players in the publicly traded markets aren’t always gunning for share value to grow.
GameStop is lucky – they were given a second wind by retail investors.
But hundreds, if not thousands of other publicly traded, struggling businesses have not (and will not) be given a second chance.
When hard times hit, the last thing any organization needs is numerous parties betting on their failure.
Last year, as retailers across the country were forced to shut down, retail REITs faced many challenges. Vacancies mounted, decreasing revenue. Property values themselves also took a hit as shutdown uncertainty cooled demand.
To make things harder, short interest in retail REITs skyrocketed. Tanger Factory Outlets for example, has over 30% short interest as of February 12th, 2020. That only adds anvils to already-heavy challenges.
In current market conditions, Tanger Factory Outlets would likely be better off as a private REIT. Were that true, they would be insulated from the downward market pressure of short sellers simply because, well, their shares wouldn’t be shortable.
No day trading
One publicly traded share can be, and often is, traded numerous times a day. Day traders and algorithms are the arbitragers of investing.
They have little to no interest in the long-term success of an underlying company. For them, it’s not really an investment – it’s a trade.
In fact, short-term traders are generally quite agnostic about what they’re investing in (especially the algorithms).
Their strategy is to capitalize on short-term price action. That’s it.
They jump in for a few hours, maybe a few days, and leave.
This ebb and flow of day trader capital in an investment pretty much only brings volatility to the share price, blurring the true value of an asset.
The rise of commission-free and independent traders has increased the ranks of these kinds of traders substantially.
This type of activity is, for the most part, a non issue in private REITs.
When investors buy shares in private REITs, they generally intend to hodl it for the long term.
Shorting, ETF groupings, and day trading are all volatility variables that are not factors when investing in private REITs.
The result is a steady investment foundation on which to determine the best possible strategy to optimize shareholder return without fear of unexpected liquidity issues.
HappyNest’s portfolio is poised for steady growth
While some real estate sectors have hit rough times, others have experienced tremendous growth. HappyNest’s portfolio been on the right side of that line and has a bullish outlook.
All of HappyNest’s portfolio properties have active, 8-10 year rental agreements with major organizations such as FedEx, AutoZone, and CVS.
Given the balance sheet of these organizations, we expect our revenue flow (i.e.: rent) to remain steady as well as the value of our properties to continue to appreciate.
Everyone has to decide their own investing strategy risk tolerance.
But no matter your investing style, having a steady and reliable investment in these volatile times not only brings ROI (and passive income), but also peace of mind.
There’s little doubt inflation is coming. By some measurements, it’s already here. The question is: How do you proactively hedge your portfolio against this value crusher?
If history is any guide, private real estate is the heavyweight champion of inflation hedging compared to alternative investments.
To better understand what lies ahead, we need to understand how we got here, and why real estate tends to perform well during periods of high inflation.
What is inflation?
Nobel prize-winning economist Milton Friedman once said: “Inflation is taxation without representation.”
That’s because inflation is primarily a function of federal policy on things like interest rates and price controls. These things have the ability to erode your purchasing power significantly, and the decision makers are appointed, not elected.
Inflation is often the product of increasing the supply of currency without a corresponding increase in economic output.
It’s important to understand that the value of anything is dynamic and relative. Economists assess the value of a currency against things like other currencies, the cost of goods, and asset pricing over time.
As costs increase – particularly on fundamental commodities like oil, timber, or metals – purchasing power decreases. Inflation is afoot.
How is inflation measured?
Economists have created several models to calculate the rate of inflation.
The federal government has two ways of measuring inflation. There’s:
Inflation rate: Poorly labeled, what is often referred to as the ‘inflation rate’ is actually an index that measures the rate of change in inflation compared to the previous period (year over year, for example).
Consumer price index (CPI):CPI is a calculation based on the prices of consumer goods across various sectors, such as the cost of energy, groceries, housing, etc.
CPI is the metric that impacts the average American directly, as it is based on recurring household expenses. As the cost of these goods rises, Americans feel the pinch.
In April 2021, Federal Reserve Chair Jerome Powell announced that the consumer price index had clocked in at 4.2% for the month.
That’s the highest monthly rate of increase since 2008 – and we all remember what happened in 2008.
Inflation on Wall Street
This increase was expected. The Federal Reserve printed trillions of dollars in order to address the economic fallout due to shutdowns ordered in response to COVID-19.
It’s hard to be economically productive in lockdown. As a result, the output of the United States (GDP) went down by 2.3%. Not bad, all things considered.
Yet, the S&P 500 – an index that reflects the 500 biggest companies in the U.S. – gained over 16% during the same period.
Peel back another layer of this onion and things get even more eye-watering.
Price-to-earnings ratios (PEs) are used to assess how expensive a stock is relative to the underlying company’s earnings. The higher the PE ratio, the more expensive the stock is.
Between January 1, 2020 and January 1st 2021, the S&P 500’s overall PE ratio jumped from 24.88 to 40.3. That’s just shy of a 40% increase.
Data source: multpl
Clearly, gains were not based on the improvement in performance of the S&P 500 companies, but on an influx of capital into the markets.
The logical explanation for this disparity is that a considerable portion of the newly minted greenbacks found their way into the stock market.
Stocks simply got more expensive. Investors need more capital to buy the same amount of shares they did in 2019 without the fundamentals of the companies backing that price hike. This discrepancy reflects inflation.
Inflation on Main Street
As asset and commodity prices increase, the purchasing power of the dollar declines.
It’s a sneaky force that debases the value of your savings account.
The cohort that ends up paying the heftiest price for inflation are wage and salaried workers – particularly if they don’t own assets that appreciate in value. Wages haven’t historically kept pace with inflation, let alone during years of elevated levels.
Put it this way: If you had $10,000 sitting in a savings account in April 2020, you’d need to have $10,420 in there now to buy the same amount of goods this year.
And that’s only if you trust the numbers reported by the Federal Reserve.
Other economists, including famed contrarian investor Michael Burry – who foresaw the 2008 Financial Crisis – believe the real rate of inflation is significantly higher than the numbers reported by the fed.
Michael Burry Twitter
Real estate as an inflation benchmark
In addition to the S&P 500, the real estate market serves as a reliable benchmark for inflation indexing. That’s because the need for housing remains fairly consistent, and the supply grows slowly.
According to a report by Zillow, the housing market gained 7.4% in value during 2020. Furthermore, Zillow projects this trend will not only continue, but accelerate throughout 2021.
If you own property, that’s good news. Your net worth just grew by however much your real estate asset(s) appreciated.
If you don’t…you slipped 7.4% further behind on your journey to homeownership. That figure could well be 15% by the end of the year against the 2019 level.
Time to ask the boss for a big raise.
Considering the real estate market gained 7.4%, and the S&P 500 gained 16% in 2020, perhaps Burry is right to raise an eyebrow at the Federal Reserve’s reported CPI of 1.4% for 2020.
Inflation on the global stage
A hallmark of inflation is that the prices of commodities start to rise, particularly in assets where production of the supply has bottlenecks or lead times, and therefore grows slowly.
To understand this better, it can be helpful to think of the dollar itself as an asset.
After all, the global community certainly does. That is why many foreign governments hold large reserves of U.S. dollars.
Relative to other countries, the U.S. has enjoyed decades of growth and stability. Subsequently, the U.S. dollar has proven to be a reliable store of value, particularly relative to other volatile currencies.
However, the DYX –a measurement of the dollar’s value compared to a handful of other foreign currencies – has been melting like an ice cream cone on a hot summer day.
Because the U.S. dollar is the global reserve currency, a big slide in the DXY could prove especially catastrophic if foreign governments were to liquidate their holdings.
We don’t know, J.Pow, but those inflation numbers just aren’t checking out.
Why real estate thrives during periods of inflation
When it comes to inflation and real estate value, it’s a classic case of ‘a rising tide raises all boats.’
From an investment standpoint, an asset with a fixed or slow-growing supply, but steady or increasing demand, will gain value over time.
Building a house requires permits, materials, construction time, and financing. The growth in supply tends to be slow.
Constricting supply growth either further, the price of building materials for new homes have skyrocketed over the last year.
That adds additional challenges to expanding supply. Meanwhile, thanks to the work-from-home and ecommerce revolutions, demand in several real estate sectors has skyrocketed.
Money printer go ‘BRRR’
Now, let’s sprinkle in that extra three trillion dollars that got injected into the economy in stimulus measures. That alone would have led to significant gains in the real estate market.
Let’s say we have a total economy worth $1,000,000, and a total of 10 houses in the real estate market worth $10,000 each.
If the same economy then prints another $1,000,000 – without a corresponding increase in economic output – the total economy is now worth $2,000,000. Those same houses are now worth $20,000.
Good if you owned one of those houses. Less than optimal if you didn’t, particularly if your bosses didn’t give you a 100% raise during the same time.
The U.S. did not double the amount of dollars in circulation like in the example above. But it illustrates the point that real estate appreciates in tandem with inflation.
Interest rates, the accelerant
Despite shutdowns and high levels of unemployment, the real estate market gained more value in 2020 than it had in any other year since 2005.
Part of that is that the borrowing costs of money have been historically low. Borrowing money is easy and cheap, enticing more potential buyers into the market.
Institutional investors take advantage of these low rates by borrowing at 0% and investing that money into assets that yield 5% or more – like the real estate market, because hell, why not?
Real estate is an attractive investment to whales, because it can generates income in the form of rent from the jump. Rent prices increase with the value of the leased real estate. (Brace yourselves, renters).
By setting up REITs, institutional players can optimize yields through corporate tax exemptions.
Given that the Central Bank recently said they wouldn’t hike interest rates in the near term, the real estate market’s value appreciation is slated to continue as interest-free investment capital flows in.
This adds more weight to the demand side of the equation.
Get your slice
You may have caught on already, but there are winners and losers when it comes to inflation.
The winners own assets and investments that appreciate substantially without any extra effort on their part.
Unfortunately, waged and salaried workers whose pay doesn’t keep pace with rising commodity prices get pinched. Their purchasing power is increasingly eroded. The average 2–3% annual raise fails to reconcile the decline of the dollar’s purchasing power.
With indicators of inflation already flashing code red and graphs moving into exponential inclines, investing in real estate can protect your net worth against erosion in value.
Even if you’re not in a position to buy property, you can enjoy the market’s gains by investing in REITs like HappyNest, for as little as $10. From there, it’s entirely up to you how much you want to invest, every dollar of which carves out your stake in the real estate market and its future gains.
Getting on the right side of inflation
HappyNest generated 5%+ returns every quarter – for a total of over 20% compounded annualized return – for its shareholders in 2020.
Our shareholder ROI outpaced both the S&P 500 and the overall real estate market’s gains, even accounting for the influx of capital and inflation.
As HappyNest’s portfolio of properties appreciates in value, so will your investment. While investing always comes with risk, HappyNest’s properties currently have reliable tenants like FedEx and CVS on 8- to 10-year lease agreements. We don’t anticipate any interruption of dividend payments. We expect to have ample time to react in the event of an unexpected vacancy.
