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Are REITs Right For You?


REITS (Real Estate Investment Trusts) may be an appropriate allocation for a portion of your real estate-oriented investment portfolio. But what are they, and what are the benefits of a private fund investment in single-family homes versus an investment in large publicly traded REIT?

First, a definition, from the Financial Dictionary: “A REIT is an investment company that invests exclusively in real estate and mortgages. The REIT issues a fixed number of shares at its establishment, and afterward neither increases nor decreases the number of shares. A REIT is actively managed, meaning that the real estate underlying the trust change from time to time in accordance with the fund's investment goals. A shareholder may trade shares in the REIT as if they were stocks. The REIT itself is not taxed; rather taxes are passed on to shareholders.

Six REIT Categories

At the end of 2014, publicly traded REITs were worth more than $907 billion, according to the National Association of Real Estate Investment Trusts, an industry group. Here are six major categories of REITs – the first five are commercial; the last, residential:

1. Retail REITs. Approximately 24% of REIT investments were in shopping malls, strip centers, and freestanding retail as of June 30, 2015, according to REIT Expert. This represents the single biggest investment by type in the U.S.

2. Residential REITs. Residential REITs own and manage multi-family rental apartment buildings and manufactured housing. The biggest residential REITs tend to focus in the biggest cities.

3. Office REITs, as the name says, invest in office buildings; the owners get rental income from tenants with long-term leases. It's better to own a bunch of average buildings in Washington, D.C., than it is to own prime office space in Detroit, for example.

4. Mortgage REITs. Approximately 10% of REIT investments were in mortgages as opposed to the real estate itself as of the middle of 2015 The best known: Fannie Mae and Freddie Mac. According to Forbes, “Mortgage REITs do not own property directly – they finance properties through commercial loans. Mortgage REITs are basically a type of bond investment rather than a real estate investment.”

5. Healthcare REITs invest in the real estate of hospitals, medical centers, nursing facilities, and retirement homes.

6. Single-Family Home REITs. This is the newest entrant into the REIT category, now only a few years in the making, but with several billions in assets. From Barron’s “It may take years before investors know just how profitable single-family REITs are, net of costs.”

Some key differences between private funds and REITs include:

Private-Fund Single-Family Homes (SFHs) Are, Well, Private; REITS Are Publicly Traded. The impact of being a publicly traded company is that REITs are driven to meet performance hurdles for analysts in order to drive stock price - which might not always be the best long-term option for the company.

Private-Fund SFHs Have Comparatively Smaller Compliance Costs Than REITs. Large public companies including REITs have tremendous compliance costs that private funds don't have.

Private-Fund SFHs Seek Income; REITs Seek Total-Return (Generally Speaking). Investors in SFHs typically prioritize income over capital appreciation. Income can vary based on the location, age, size, and management of the properties. The Dow Jones Equity All REIT Index average annualized total return was 6.80% for the 10 years ended June 30, 2015.

Private Fund SFHs Are Less Liquid than REITs. Unlike a privately funded single-family home investment pool, many REITs are traded on stock exchanges. Investors can invest in the companies individually or via an exchange-traded fund (ETF), mutual fund, or a REIT ETF or Fund Index. Publicly traded REITs, whether as mutual funds or ETFs, have daily liquidity; the liquidity of either one or a portfolio of SFHs of course may take longer to sell.

So, do you place your real-estate-allocated-dollars in REITS or in single-family homes, or both? Your hairdresser may not know, but your financial advisor and/or tax advisors may help.

For more information on why your should consider investing in a professionally managed portfolio of single-family homes, please contact Harold Willig at 917-209-4452 or harold.willig@springviewinvestments.com

Harold Willig is the Manager of SpringView Investment Management, LLC, which he founded in 2012. Mr. Willig also served as HFZ Capital Group’s Chief Financial Officer, and was responsible for the oversight of HFZ's Finance and Accounting team. He has over 17 years of finance and accounting experience. Mr. Willig also ran a consulting practice and provided valuation, analysis, and transactional support services to multi-billion dollar real estate companies. Previously, Mr. Willig served as the Senior Controller and Vice President of Financial Analysis and then the Chief Financial Officer of the Athena Group, a multifamily development company and fund manager.

This post does not constitute investment, tax, legal, or real estate advice. It is not a recommendation or an offer to buy or sell. No warranties implied. Past performance does not guarantee similar future results.

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