How to Invest in Commercial Real Estate Through REITs
An Affordable Way to Invest in Real Estate
A Real Estate Investment Trust (REIT) is a company that owns and operates cash flow-positive commercial real estate. REITs pool capital from investors to purchase institutional-quality real estate and pay for operational costs. This makes it possible for investors to enjoy monthly dividend payouts from income-generating properties.
Since their introduction in the 70s, REITs have grown to be a trillion-dollar industry. Over 145 million Americans have cumulatively earned billions in REIT shares dividends. REITs are attractive investment options since they are mandated by the Internal Revenue Service (IRS) to pay 90 percent of income from properties as dividends to shareholders.
Think of a REIT as a mutual fund, for which you can buy stocks of different genres of real estate properties. When you invest $5,000 in a REIT managing 10 commercial properties, you'll basically own a portion of those properties that generate rental income, which comes back to you in the form of dividends. Depending on the REIT that you invest in, your portfolio could include a mix of multifamily units, offices, industrial and manufacturing properties, data centers, healthcare facilities or even cell towers.
Why Should You Invest in Real Estate Through REITs?
Geography and the genre of property (offices or apartment buildings) play an essential role in real estate acquisitions. To choose premium commercial properties, REIT fund managers strive to balance real estate diversification, long-term land appreciation and short-term dividend payouts. Why should you go through REITs to own real estate, though? Well, in an attempt to democratize the real estate market, fintechs now allow a wider range of potential investors to own REITs shares at a reasonable price, to generate income from real estate.
The high cost of commercial space was one of the main reasons why ordinary people couldn't buy a house or an investment property until later in life. At a time when 90 percent of Americans view housing as a better investment than stocks and 97 percent start their home search online, fintech has taken the opportunity to reshape the real estate industry.
Why Should You Invest in Commercial Real Estate?
While hotels, retail and offices may take longer to recover from the pandemic, segments like industrial and logistics real estate, data centers, life science industries and multifamily units remain in high demand. The need to buy everything online during the pandemic has led e-commerce giants to rent industrial spaces for storing inventory to meet the growing demand. Land appreciation aside, owning commercial properties may come with several more advantages:
- Hedge against inflation: Real estate might share an inverse relation with inflation, thus offering an inflation hedge. This could be true, especially for diverse portfolios with multifamily units and single-family rentals that often witness a rise in land value and rental income during high inflation phases.
- Tax savings: Commercial real estate investments may come with bigger tax breaks. When a commercial property depreciates, you may deduct a portion of your property value from your taxable income each year. This could significantly reduce your annual tax bill.
- 1031 exchange: Profits from the sales of REITs stocks could be taxed at a whopping 37 percent with an additional 3.8 percent surtax on investment income. Fortunately, 1031 like-kind exchanges exist to help you avoid paying capital gains taxes on property sales. This law states that you defer taxes on any profits made from selling your property by using the sale proceeds to purchase another property.
- Stable income: Unlike residential properties, most tenants in commercial real estate sign three-year agreements. This long-term stable rental income may contribute to the regular dividend payouts from REITs. While the pandemic affected hospitality, retail and offices the worst, the gradual easing of COVID-19 restrictions and opening of brick-and-mortar stores show signs of recovery following a long stint of revenue losses.
- Triple net lease: Triple Net Lease requires tenants to maintain a commercial property, and pay real estate taxes, building insurance costs and other expenses on top of rent and utilities. Since tenants in commercial buildings are usually businesses trying to market their products with rented retail space, you may expect them to maintain it well and pay rent on time. Some online crowdfunding real estate platforms offer REITs with commercial spaces managed by vetted property managers, as well.
These advantages all contribute to the intrinsic growth in commercial real estate value over time. However, it is important to always look for market insights, transparency, growth projections, and fees when checking out online real estate crowdfunding platforms.
How to Find a REIT and Invest in It
The National Association of Real Estate Investment Trusts (NAREIT) maintains an online database, where you can sort REITs based on sectors, listing status and performance.
Although affordable entry into real estate offered by emerging fintechs is encouraging new investors to buy real estate, investing in commercial real estate through REITs that grow your money and pay regular income could prove to be a real win. RealtyMogul happens to be one of the oldest crowdfunding real estate platforms that offer investors access to two custom-built REITs, each requiring a minimum investment of $5,000. While the initial investment is comparatively low, there could be certain limitations to the amount you can invest in its REITs based on your annual income or net worth. Here's an insight into RealtyMogul REITs:
- MogulREIT I: Ideally, investing in real estate should fetch monthly passive income as well as long-term land value appreciation. RealtyMogul manages two REITs to align with this idea. MogulREIT I is designed to bring in monthly cash flow to investors. The REIT comprises 11 strategically located multifamily units, offices and retail with a total asset value of $273 million. With 6 percent annualized returns, the REIT has made 54 months of consecutive payments to 6,027 investors since its inception, totaling $13.3 million. This REIT showcases several multifamily units, which are expected to rebound with a 33 percent gain in 2021.
- MogulREIT II: This REIT is focused on multifamily units for wealth creation through long-term appreciation with quarterly payouts from rental income. There are 10 investment properties totaling $214 million in asset value in MogulREIT II, which has made consistent quarterly distributions to 2,400 investors since January 1, 2018, at a 4.5 percent annualized return rate.
The goal here is to balance monthly cash flow and growing wealth through land value appreciation. Investing in both these REITs could boost your income from monthly and quarterly payouts, as well as bring about asset growth through appreciation.
Before investing in REITs online, it is vital to understand the due diligence process. Since 2012, over $3.1 billion worth of real estate deals were financed through the RealtyMogul platform, and currently has over 222,000 investors on board. It was able to achieve this using its stringent review process that mainly revolves around the project sponsor and the property, each vetted by RealtyMogul. Once it shortlists properties based on several metrics like projected returns and diversity in property type and location, it will begin a credit and legal review of the operating partner who will take care of the day-to-day activities for you.
In a nutshell, you will be buying a mix of properties that are favored to perform during recessions and are managed by vetted partners with a good track record. After successful vetting, the Realty Mogul investment committee will need to make the final approval after further scrutiny before listing the property on its platform.
The firm offers a free membership that allows you to easily browse through its marketplace.
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The content of this article is for informational purposes only and does not constitute any financial or investment advice. It's important to perform your own research and consider seeking advice from an independent financial professional before making any banking or investment decisions.
