REIT investing offers benefits to a real estate portfolio but also some clear drawbacks – until this new type of digital REIT
REITs offer all the benefits of real estate investing without the high down payment or management headaches but they do have their cons.
I have one retirement investing account, a self-employed IRA, that is almost entirely invested in REITs but there are some drawbacks to the investment. I never really know what properties management is buying and it’s tough keeping up with the analysis on the entire portfolio.
By the end of this video, you’ll have a better way to get those real estate returns but without the limitations in REIT investing.
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Our REIT Investing Series
This is the second in our three-part REIT investing series and I’m excited for this one because we’re going deeper into that investing strategy that’s going to mean higher returns and lower risk for your portfolio.
In partnership with stREITwise, I’m going to show you how REIT returns fit with your stocks and how much you should have invested in this real estate strategy. We’ll also talk about online REIT opportunities and how stREITwise has a unique strength in real estate investing with an ultra low-cost structure.
In the first video, I showed you how real estate returns blew the doors off stocks as well as smoothing out those big stock market crashes. In fact, an investment in a REIT fund over the last 30 years more than doubled the return on stocks. That’s a REIT return of almost 1,800% versus just 700% for stocks.
We also looked at those sweet dividend returns for REITs from the special tax treatment they get. On the average annual return of 13.5% for exchange traded REITs, more than half, almost 8% is from the dividend return every year according to the National Association of REITs data.
So with real estate you get that high cash flow, property price appreciation, the tax advantage and it’s a real asset so maximum protection from inflation.
Why Everyone Needs to Invest in Real Estate
But the answer to our real estate versus stocks question wasn’t either – or, it was how to use both to get that perfect balance of returns and cash flow but without the downsides of each. That’s what we’re going to talk about in this video, how REITs and the newer online REITs fit into your diversified portfolio for the perfect mix of risk and return.
We know that we need that real estate exposure in our wealth building strategy. While stocks are probably still going to be the biggest part of your portfolio, you need a percentage in real estate to limit your risks in the next stock market crash but to provide that return you need to meet your goals.
Bonds aren’t going to do it. Bonds will protect your money but you’ll earn all of about two or three percent after inflation.
Now understanding exactly how much of your money you want in real estate depends on your age and other factors like your goals and how much stress those ups and downs in the stock market cause you. In my investing course, I usually recommend investors start with at least 10% of their wealth in real estate and increase it as they get older and need those stable cash flows.
This is going to be up to you. I have just over a third of my wealth in real estate through three rental properties, REITs and real estate crowdfunding. The real estate funds in my portfolio offer a chance for those cash flows I like from property investing but without the constant management headache.
New Online REITs Solve REIT Investing Problems
A benefit of the new online REIT investment is that it gives you a better idea of what you’re buying compared to exchange traded REITs that might have hundreds of properties in the portfolio.
Managers for the large, multi-billion dollar REITs are constantly having to buy properties or develop new ones and it can be a drag on returns if they can’t keep cash invested. Smaller online REITs are easier to manage and you’ll be able to keep up-to-date on exactly what properties are in the portfolio.
Now not all real estate crowdfunding or online REITs are available to everyone. To invest on some platforms you have to be what’s called an accredited investor with a net worth over one million or a certain annual income. It’s part of the reason I like stREITwise because anyone can invest in the 1st stReit Office fund with as little as $1,000 and as of the date of this video, has paid a 10% annualized dividend yield.
Founders of the platform combine 40 years of real estate experience with nearly five and a half billion dollars in property transactions.
stREITwise offers some of those benefits we talked about with an online REIT, solid real estate diversification and transparency to know what you’re investing in. The minimum $1,000 investment is one of the lowest I’ve seen with fees lower than almost any other online REIT fund. Their first online REIT has paid out a 10% annualized dividends since inception in September 2017.
Drawbacks of Traditional REIT Investing
That fee transparency is an important point that most investors don’t catch until it’s too late. All companies have to disclose their fees, but it’s usually done deep in the fine print or in a prospectus several hundred pages long.
As an online REIT investor, there are four types of fees you need to watch for when investing. First are the one-time offer fees. These are usually around 5% of your initial investment but that’s only if the project raises its target funding. If it raises less then those offer fees can jump as a percentage of what is actually raised.
Another fee that is really confusing in the real estate crowdfunding space is the asset management fee. Most investors are familiar with this but it works differently here.
A lot of crowdfunding platforms don’t actually manage the property investments, they’re basically just banks, but they charge that annual fee and then the developer in charge of the project is likely going to be charging an additional fee. So you’re actually paying two management fees here.
Those first two fees can add up but it’s these other transaction fees that really eat into your return. This is a fee charged whenever a deal sponsor has an event like acquiring property, financing it or leasing. These fees aren’t included in the management fee but will come out of your investment whenever those events occur.
And last are performance fees. These are common in hedge funds or private equity where the manager gets maybe a 2% base fee plus 20% of profits as an incentive.
I always loved these fees when working in venture capital because that’s where my real money was coming from. I might only make low six-figures on the base fee but charge 20% on a profit of $50 million and it’s a hefty bonus even split across a team.
stREITwise is one of the first to come out against this fee structure with a fixed 3% offer fee, no transaction or performance fees and since the platform manages properties directly, there’s just the one management fee.
What is stREITwise?
The company aims to invest in properties with a value-oriented strategy combining creditworthy tenants in non-gateway markets. This means it can acquire quality properties with a sustained occupancy that are positioned to outperform the broader market.
The current fund available is the 1st streit office, a diversified portfolio of institutional-quality office buildings and have paid a 10% annualized dividend yield since inception
I’ll be highlighting the online REIT in our next video on how to analyze real estate investments because this is a solid fund. The property has almost 300,000 rentable square feet with tenants like the corporate headquarters of Panera Bread and New Balance athletic wear.
Besides that low minimum investment and the fact that anyone can invest on stREITwise, I like the platform because it charges some of the lowest fees in the industry. Upfront fees on other online REITs can be very high but stREITwise fees are capped at 3% and an annual management fee of two percent.
Investing on stREITwise literally takes less than 5 minutes. When you click on Invest Now here on the website, you’ll go to a secure page with SSL internet security to enter contact information and how much you’re planning to invest.
We’ll be looking at a specific online REIT property in our next video, detailing how to analyze property investments and how they fit with your portfolio so you’re not going to want to miss that. I wouldn’t say avoid traditional REITs completely because they do offer a great way to get some diversified real estate exposure for your portfolio. Take a look at the new crowdfund REITs and other options to solve those problems in exchange-traded REITs.