Active vs. Passive Real Estate Investments
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Many investors are turned off by real estate because they do not have the time or inclination to become landlords and property managers. Both of which are, in fact, a career in themselves. Fortunately, there are other ways for passive investors to enjoy many of the secure and inflation proof benefits of real estate investing without the hassle.
Limited Partnerships
LLCs and LLPs
Partners
REITs
Limited Partnerships:
Throughout the 1970s and 80s the most popular investment vehicle used by passive investors to participate in the benefits of real estate ownership was through the use of Limited Partnerships. LPs are still used today but their popularity suffered dramatically after the 1986 Tax Reform Act drastically reduced the deprecation deduction available to investors. LPs leveraged the tax benefits of deprecation much like traditional real estate investments leverage equity. We discuss the subject in much more detail on our Limited Partnerships page.
LLCs and LLPs:
Limited liability Companies and Partnerships are a fairly recent creation in most states. They are particularly advantageous to real estate investors because they allow tax benefits, including deductions for deprecation and operational losses, to be taken against ordinary income on a personal return, while limiting your personal liability in much the same manner as a corporation.
Partners:
There are many ambitious hard working young people who have everything necessary to get ahead in life, except rich relatives or seed capital. Advertise that you have venture capital available in places likely to be seen by your ideal partners. Then utilize the tenant screening techniques available to you on RHOL pages to help you determine which of the many candidates likely to respond is the best one for your first venture. The partnership can be constructed in a myriad of ways, some of which give you most of the tax benefits and appreciation, while providing your young partner with badly needed income.
REITs:
Real Estate Investment Trusts may well be an answer for you, and perhaps the single best investment you can put in your IRA, pension or retirement plan. A typical REIT has the advantages of real estate but protects you with all the built-in safety, diversification and professional management of a well-run, conservative mutual fund.
There are several ways to Profit
History teaches us that inflation is sure to pick up again, because governments who can print money . eventually do. That historical fact also indicates that you now have a once-in-a-generation opportunity to buy real estate at bargain basement prices and ride what many are convinced will be the most powerful comeback of the next ten years. And there is no better or more convenient way to do it for most working families than with REITs.
REITs are really just like the stocks that trade on the major exchanges. They are, in effect, mutual funds of investment grade properties. They pay out 95% of their income as dividends, reinvesting the rest. Because they trade just like other stocks, that allows you to invest as much, or as little, as you want. And instead of hassling with the multitude of ways local government interferes in rental housing, late paying tenants and broken toilets, you can get in on the real estate ride up as easily as picking up the phone and calling your broker. You'll be letting professional managers handle all the fuss and muss. And when you're ready to sell, no need to place classified ads and show the place to prospective tenants. Just call your broker and say, "sell."
REITs have performed better than stocks, despite a recent lackluster real estate market. Since 1975, during the biggest bull market in stock market history, REITs have quietly outperformed stocks by 17% a year vs. 15% a year. That doubles your money every 4.2 years.
Less Volatile Than Stocks. REITs have a "beta" of only .65, meaning they're 35% less volatile than the stock market. They give you wonderful diversification from the storms of the S&P 500.
Best Real Estate Performer. Between 1975 and 1995, all forms of property (including houses, land, buildings and other structures) in the U.S. appreciated by a modest 8% per year. Owner occupied single-family homes gained only about 6% a year, just barely outdistancing inflation. By averaging 17% a year, REITs actually blew the socks off other typical other real estate investments, as well.
Better Than Bonds. REITs now yield about as much as bonds (6%-7% or so). Yet, while bonds get killed by inflation, REITs profit from it. And with REITs, your dividends can grow by 6% a year, something your bonds or CDs will never do.
Better Than Utilities. REITs yield more than many utilities, yet are superior in many ways. Example: when utilities make too much money, government regulators seek a rate rollback. But when REITs rake in big extra profits, they give them all to you, the owner. No government regulators scream that you're making" obscene" profits. Moreover, utilities must usually receive approval from regulators to raise prices to cover higher expenses. REITs require no such approval. Shopping center leases and subsidized rental housing, for example, typically provide for rent increases tied to the Consumer Price Index. This allows REITs to capture rent increases brought about by inflation.
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Find information and links to helpful REIT sites at : National Association of Real Estate Investment Trusts | The REIT Investor | Daily ederal Real Estate Filings |