Feb. 15, 2018, 12:02 p.m. | Lucro Staff | Deal Review

The Role of REITs in Multifamily Commercial Real Estate

Real estate investment trusts, or REITs, are companies that manage and finance real estate that generates income… and they’re a bit of a rollercoaster investment. Many investors are aware that REITs manage and control portions of shopping malls, office buildings, factories, hospitals, and other types of commercial real estate, but they also manage condo buildings and housing developments.

REITs are often posed as great long-term investments, having achieved annualized returns of 14.1% from 1975 to 2014. In the short term however, REITs can experience significant drawbacks (like in 2008) so they do present a fair amount of risk to investors.

Another interesting wrinkle in REIT investment is that  distributions are taxed as normal income, but only once at the shareholder level. Because of this unique feature, REITs are great for the tax-deferred accounts, such as IRAs and 401(k)s.

Investors seeking access to real estate exposure without direct ownership have a variety of options.  Along with direct purchases of REITs, investors can also buy real estate focused mutual funds, which invest in REITs and other real estate companies.  In fact, potentially due to the diversification benefit, these mutual funds have generated a greater return over time than their REIT counterparts.  Choosing to invest in pooled real estate assets is a risk – but has the potential to pay off big… and your choices in how you invest are expansive.

We’re going to take a closer looks as to how REITs manage and finance multifamily properties, and what it all means for you as an investor.

Invest in a property, or a REIT?

Many assume that purchasing a real estate asset directly will generate returns that outperform REITs. According to an article by The Globe & Mail, REITs are actually more profitable than purchasing a single-family property. But how do they compare to investing in a multifamily property?

We’re all aware that purchasing an apartment complex would be an enormous investment that the average consumer wouldn’t dare step into. Purchasing a REIT can often be just as strong as an investment, with returns in the double digits. It just depends on the timing – because at a certain point, they’re at risk for dividend cuts.

The “passive” investment

Most of the work that comes with purchasing REITs is simply the work it takes to find out which one to purchase. Forget about traditional landlord duties –  none are required when purchasing multifamily properties. The trusts decide which investments they’re going to make while you simply watch. However, you can’t purchase a REIT below market, like you can purchase a multifamily property.

In the end, REITs are fairly passive ways of generating income and can be quite beneficial to those who aren’t interested in the upkeep and renovation that are part of owning a multifamily property.

Mutlifamily sector proves profitable

Some REITs work harder than others, and multifamily properties are key to keep your eyes on. Rents are high – and millenials are more fond of renting than purchasing their own homes. Retail REITs will continue to slow as brick-and-mortars close across the country.

Thinking small

According to an Investopedia article, small REIT firms also have the ability to explode. If you decide to choose a smaller investment, it could mean a higher ability for that REIT to grow faster and quicker. After doing the proper research, choosing a REIT that invests in a particularly hot neighborhood might show superior returns over a long investment horizon.

Worldwide potential

Don’t forget to think about investing in a multifamily REIT that’s global. Growth in markets that are starting to take off can prove to be a worthy investment. The U.S. has more widespread, developed REIT options, but many countries have GDP rates accelerating that you shouldn’t dismiss.