Everything you need to know about REIT

What are REITs?

What are REITs? REIT is an acronym for Real Estate Investment Trust (REIT), which can be defined as a company that owns and operates real estate that is income producing, as well as owning assets relating to real estate. In 1960, Congress established REITs to allow investors and individuals the ability to invest in wide-ranging and large-scale income producing properties. REITs differ from other real estate investment types because REITs are required to develop and acquire investment properties with the purpose of operating them as part of an owned investment portfolio, whereas typical real estate investors resell properties after they have been developed or renovated, and/or after holding an investment for a profitable period. Income producing properties own and operated by REITs include a range of property types, such as apartments, shopping malls, hotels, manufacturing warehouses, office buildings, in addition to mortgages and mortgage-backed securities. Majority of REITs prefer to specialize in a specific property type, for instance, retail properties. There are multifamily REITs, office REITs, Retail, and REITs that specialize in healthcare facilities, in addition to others. REITs provide a way in which individual investors can reap the benefit of earning a portion of income produced through the ownership of commercial properties, without having to go through the process of purchasing one.

Types of REITs

REITS can be categorized as mortgage, equity, or hybrid. Most REITs are equity REITs, which normally operate and own income producing properties. Conversely, mortgage REITs provide real estate owners and managers with money directly as loans or mortgages, or indirectly as the purchase of mortgage-backed securities. Mortgage REITs on average, rely on more leverage than equity REITs, as they rely more on borrowed capital. In addition, mortgage REITs typically manage their own credit risks and interest rates through derivatives and other types of “hedging” techniques. Hybrid REITs are companies that utilize a mixture of investment type strategies from mortgage and equity REITs.

Public REITs, whether mortgage, equity, or hybrid are registered with the U.S. Securities and Exchange Commission (SEC) and are traded publicly on the stock exchange. REITs that are registered with the SEC but are not publicly traded are called non-traded REITs or non-exchange traded REITs.

Publicly Traded REITs

Publicly traded REITs differ from non-listed REITs in several ways. Publicly traded REITs are also referred to as listed REITs and are more liquid because REIT shares are traded and listed publicly on popular stock exchanges. Brokerage commissions are also the same as for other public traded stocks, and rules governing stock exchange require directors to be separate from management. In addition, Nasdaq and NYSE rules require independent nominating, compensation committees, and fully independent audit. In addition, the minimum investment amount for a listed REIT is one share and market prices are publicly available in real-time, as well as a range of analytic reports. Public REITs are also managed by company employees, and specific exchange rules are in a corporate governance.

Public Non-Traded REITs

A public non traded REIT files with the SEC, but their shares are not publicly traded on stock exchanges and are also referred to as non listed REITs. This causes shares to be more illiquid and share redemption programs do differ with respect to the company and are very limited on average. Individual investors typically must wait a number of years (typically 10) to receive a return on their investment until the company chooses to engage in a public transaction, such as listing shares on a stock exchange or liquidating company assets. Public non traded REITs broker commission differs as well. Fees are a typical 9% to 10% of the investment, as well as other upfront costs, management fees, and back-end fees may also be charged. Public non traded REITs also typically have no employees, a third party manages the company, and corporate governance is subject to North American Securities Administrators Association (NASAA) guidelines and state guidelines. In addition, many states have adopted NASAA guidelines and require majority directors to be separate from management. Public non-traded REIT share values are not transparent. Independent information concerning share values is typically not available. Although, companies may provide share values one and a half years after an offer has transpired.

Non traded REITs performance has been under scrutiny over recent years due to its illiquid nature, lack of valuations, and governance issues. According to the Gilbert, Ariz., a research company that tracts non-traded REITs, asserts that 2017 marks the lowest capital-raising activity over the last 14 years. According to Commercial Real Estate Direct, non traded REITs performance was up 11.3% during the fourth quarter, from the third quarter of 2017, bringing capital rising for 2017 to $3.9 billion, per the “Summit Investment Research” company. In contrast to 2016, in which non traded REITs raised $4.8 billion, approximately 23% more than 2017 figures.

Private REITs

Private REITs, also known as a private-placement REIT are non-traded and non listed REITs that are typically associated with strong risks. Private REIT requirements differ from other REITs because they are exempt from registration according to the Securities Act and are not subject to the same disclosure and requirements that non-traded REITs are subject to, making it very difficult for investors to get a sense of value or make an informed investment decision. Accredited investors and investors with an excess net of $1 million are generally the only groups that can buy private REITs, which makes them least popular. Private REIT requirements differ from listed REIT investments as they are less strenuous and unlike public REITs, such as venture capital funds and hedge funds, which do not necessarily have to give prescribed disclosures to accredited investors. The concept behind an accredited investor relies on the ability of a private REIT investor to bear any economic risk of investing in unregistered securities.

REIT Investment Caution

Like with any investment, with REIT investments one should take one’s own financial situation into account, consult a financial adviser, and do thorough research prior to making any type of investment. Public REITs’ quarterly and annual reports, offering prospectus, and disclosure filings are available for review at www.sec.gov. Public non-traded REIT investments that are listed on major stock exchanges can be purchased through a stockbroker, as with other publicly traded stocks. Non-traded shares can also be purchased from brokers, but brokers must have been engaged in the participation of the REIT offering. REIT exchange-traded fund and REIT mutual funds are also an option for investment. It is important that one understand the risks associated with different investment strategies prior to backing an investment in any type of REIT.

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Crowdfunding vs. Hard Money Lending

We all know that real estate investing takes money. What you may not realize, however, is that there are many ways you can get the capital you need to buy that investment property you always wanted. These options include crowdfunding and hard money lending. Well explore both the benefits and drawbacks of both.

What is Crowdfunding?

Crowdfunding is a way to raise money by collecting large or small amounts of money from various people. These people may be family, friends, strangers, local private money lenders, customers or investors. The money is collected via a large pool of people on crowdfunding platforms (such as RealtyeVest) and social media. The private crowdfunding requires
no prototypes, intricate marketing plans or financial institutions to be involved on the part of the investor or sponsor. Instead, you are given a single platform to showcase a business idea or pitch for research. Therein lies it’s appeal and its differentiation from traditional ways of raising capital.

 

Benefits of Real Estate Crowdfunding 

  • You reach more potential investors: Depending on the platform used, thousands of investors are available to you. You can also access more than just local private lenders.
  • Validation of business concept: You present your business or concept to everyone and receive feedback as well as funds to validate your idea.
  • Streamline fundraising efforts: Instead of presenting your ideas to multiple investors at different times, you can have it streamlined which means it is accessible to every potential investor.
  • Market fundraising campaign: Crowdfunding allows you to promote the fact you are raising money for your potential investment through all social media channels.

Disadvantages of Crowdfunding 

  • Trouble finding funding: You have a great idea, but no one is rushing to give you money to support it. You may not receive any money for months or even one year. This can be frustrating and set real estate investment opportunity back.
  • Minimum requirement is a must for most crowdfunding: Many crowdfunding companies require a large minimum to participate on their platform.
  • Crowdfunding failure: If your crowdfunding campaign falls, it does not disappear from the platform. This means that future crowdfunding ventures may be harder to obtain because of past failures.
  • Crowdfunding is for large capital projects: Crowdfunding doesn’t discriminate, but the amount of money you want makes a difference. For smaller raises, the process could be futile.

What is a Hard Money Loan?

A hard money loan is a short-term loan secured by real estate. The loan is funded by one or more private investors, or hard money loan brokers, rather than conventional lenders like banks. These loans are for any type of property such as multi-family, single-family, and commercial property. Depending on the negotiated terms, the loan term could be two to five years. The loan does require monthly payments of interest. The monthly payment could include interest and principal with a one balloon payment at the end of the loan. The amount of the hard money loan depends on the value of the property. The property could property you already owe or the investment property you use as collateral.

 

Benefits of Hard Money Lending

  • Establish a relationship with a hard money broker: A hard money loan broker is more likely to establish a continued working relationship with you when you honor loan terms. This means you can make multiple hard money loans with one lender instead of loans with multiple registered private loan lenders.
  • Get your money quickly: You have fewer rules standing between you and your money. Hard money loan brokers are not as interested in the debt you have or your credit score. So, you can obtain the money you need to buy a property faster than working with a tradition bank.
  • Barrow a large amount of money: Banks require a five to 20 percent down payment on any loan they approve. Hard money lenders do not. Hard money lenders are willing to lend you about 100 percent of the property’s purchase price. This means you can borrow more money.
  • Hard money loans are good for first-time investors: Hard money loans aren’t for every investor or investment property. However, they’re often a great starting point. More than 100 hard money loans exist. If you are new to the investment business, a hard money loan will allow you to borrow more money and use less of your own money.

Disadvantages of Hard Money Loans

  • Interest rates are high: Hard money loans typically have an interest rate 10 to 20 percent. This is often higher than a traditional bank loan.
  • Short term loans: Bank loans for investment properties can span 15 to 30 years. However, a hard money loan terms are a couple of years.
  • Origination fees are higher: Hard money loans are considered a risky investment and investors are going to charge more for the loan. It could be as high as five percent of the total loan.
  • Loss of property: If you use the property as collateral and cannot make payments, you may end up losing the property in foreclosure. This means that property goes back to registered private loan lenders.
  • Not everyone does 100 percent hard money lending: You must do your homework regarding lenders. Some hard money lenders only work in hard money lending and no other types of loans, and they’ve had hard money broker training.  Whereas others do not.

Every investment option comes with both positive and negatives, and both crowdfunding and hard money lending are no exception. The investor willing to take a risk or the one starting out, may be more comfortable with a hard money loan. You receive the money first and must repay later. If you are the type of investor who does not want to pay a loan, crowdfunding is probably your best option because it revolves around securing investors that have private money to lend. Both funding opportunities are a great way to avoid the traditional real estate funding sources such as banks and credit unions. The best option to choose depends on your circumstances, current business needs and real state goals.

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