Real estate is historically a robust long-term investment. In the US, homeownership is an elevated goal for many people. For some, extending that pursuit to add additional property becomes the foundation of their wealth accumulation strategy. And it's no wonder since buying and holding real estate can be a path to success.
Does investing in commercial properties pay off?
The answer depends on your perspective and the timeframe you evaluate. The respected Case-Schiller Home Values Index reports that over the extremely long-term period from 1890 to 2005, the average home value increases only beat inflation by one percent. With inflation averaging about 3.1 percent over the last hundred years1, that equates to an annual appreciation of slightly above 4 percent. As most people know, individual multi-year periods during the preceding century have enjoyed significant increases and difficult losses. Whether you consider real estate a good investment may depend on when you buy and sell.
According to Bankrate.com, the S&P 500 index reports that commercial real estate offers an average annual return of 9.5 percent, compared to 11.8 percent for a REIT. Bankrate cautions that calculating ROI for any investment category is subject to distortion depending on the time and other variables employed.2
Direct investments in real estate can provide other benefits besides value appreciation. For example, real estate may offer an opportunity for income and tax benefits. When you own investment property, you can deduct expenses, including mortgage interest, property taxes, and operating costs.
Direct real estate investments may come with headaches.
Owning residential or commercial property usually means dealing with tenants. For example, suppose you are a small investor in charge of your own administration. In that case, you get the weekend calls about plumbing and potentially the nightmare of repairs after an irresponsible tenant moves out. Commercial property challenges are often less urgent (since, in most cases, the tenants go home at night) but can still be very demanding and labor-intensive. While you can outsource the challenge by hiring a property manager, that will reduce your profit.
Fractional direct investments may offer an alternative.
Investing in a REIT (Real Estate Investment Trust) may offer the profit potential of owning investment property without the headaches. REITs are real estate stocks. A REIT owns, operates, and manages commercial property. The REIT sponsor chooses the investments and manages the tenants. The investors are not responsible for the tenants or property operations. To maintain their tax-advantaged status, REITs must distribute at least 90 percent of their income to the investors. This requirement often means that the investors receive income from their investment and may also benefit from appreciation.
REITs have very high historical returns, and like other securities, REITs have lower entry costs than buying real estate directly. Investing through a REIT also eliminates the need for hands-on management, and publicly traded REITs are typically liquid with an accessible market. Unlike many alternate investment vehicles like DSTs, you don’t have to be accredited to invest in a REIT.
1 Inflationdata.com, “Cumulative Inflation by Decade.”
2Past performance is not a guarantee or indication of future results.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure.
The income stream and depreciation schedule for any investment property may affect the property owner's income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.
All investments have an inherent level of risk. The value of your investment will fluctuate with the value of the underlying investments. You could receive back less than you initially invested and there is no guarantee that you will receive any income.
No public market currently exists, and one may never exist. DST programs are speculative and suitable only for Accredited Investors who do not anticipate a need for liquidity or can afford to lose their entire investment.
A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.
REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.
There are risks associated with these types of investments and include but are not limited to the following:
- Typically, no secondary market exists for the security listed above.
- Potential difficulty discerning between routine interest payments and principal repayment.
- Redemption price of a REIT may be worth more or less than the original price paid.
- Value of the shares in the trust will fluctuate with the portfolio of underlying real estate.
- There is no guarantee you will receive any income.
- Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes.
This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.
