The COVID-19 pandemic has been kinder to some real estate asset classes than others. Proactive investors can take advantage of opportunities with the potential to build wealth and generate income from investment real estate, particularly tax-advantaged investments.
Not all investment real estate asset classes are created equal. Some pose much more inherent risk than others. These include hotels, oil- and gas-related properties, and senior care facilities. These three property types carry much greater risk for different reasons, with the pandemic offering the most recent proof of their volatility. Best they be avoided as a general matter unless investors are extremely comfortable with the potential loss of their principal invested.
The pandemic has been kinder to some real estate asset classes than others:
- Industrial properties, particularly those that are occupied by logistics and shipping companies or serve as distribution hubs themselves, have performed especially well as the long-term trend toward e-commerce accelerated. (Many people who previously had resisted home delivery of goods and services embraced the concept during the pandemic.) Increased demand for delivery is expected to have positive implications for industrial real estate for years to come.
- Multifamily properties also have performed relatively well during the pandemic — notwithstanding eviction moratoriums — thanks to help for tenants in the form of direct aid and rental payment assistance, as well as forbearance from landlords. As the federal eviction moratorium winds down, multifamily assets may get a new boost as some units turn over.
- Office and retail properties have been a mixed bag during the pandemic, with suburban office prices rising in 2021 over 2020, while downtown office property prices declined year over year, according to second-quarter sales price data from Real Capital Analytics. Meantime, retail property prices as a class have stabilized in 2021, with some sectors (such as net-leased assets) outperforming the retail market as a whole.
Options for Investing in Income Properties
There are multiple ways to invest in income properties as the pandemic recedes. You can buy the stock of real estate investment trusts (REITs), purchase assets outright yourself and manage them daily, or invest in Delaware Statutory Trusts (DSTs) as a direct investment or turnkey 1031 exchange solution. All have their potential advantages and drawbacks.
With public REITs you get a high level of liquidity but little diversity from the broader stock market, as REITs tend to rise and fall with equity markets. You also have to pay capital gains tax on any REIT share gains, which can create tax liabilities of 40% or more.
Sole, direct ownership of investment real estate is another way to tap the market’s potential to generate income and appreciation. But while many people are initially enamored of being a landlord, the real-world headaches of tenants, toilets and trash are enough to dampen the enthusiasm of even the most exuberant investors. Plus having all your eggs in one basket provides no diversification.
With Delaware Statutory Trusts, investors in many ways have the potential to experience the best of both worlds: Direct real estate ownership of diverse assets without the hassles and stresses of being a landlord.
DSTs can hold title to all manner of investment real estate, with investors passively participating. There is the potential to generate income (positive cash flow) and appreciation — just like with sole, direct ownership. There also are other tax advantages of real estate investment, including depreciation deductions to help shelter income. And DSTs are 1031-exchange eligible, unlike many other real estate co-investment structures, which means that any capital gains on the sale of assets can be deferred if the proceeds are reinvested into other income properties … which may help investors build wealth.
DSTs have relatively low minimum investment amounts — typically $100,000. Many investors own shares of multiple DSTs as a diversification strategy. Some DSTs are structured as all-cash Delaware Statutory Trusts whereby there is no risk of a lender foreclosure, and others are structured with nonrecourse long-term fixed-rate financing for those investors seeking a leveraged DST offering. To learn more about DSTs, visit www.kpi1031.com.
Where Is the Real Estate Market Headed?
What lasting impacts will the pandemic have on the investment real estate market? My crystal ball is in the shop (Please forgive me!) and some of the impacts remain to be seen, including on the downtown office sector. But, regardless, real estate is likely to remain an attractive asset class for many investors interested in diversification and the pursuit of income and appreciation. (As always, diversification does not guarantee profits or protect against losses, and income and appreciation are never guaranteed with any investments.)
The key is to identify attractive opportunities, fully vet them, and consider the tax implications of the various real estate investment structures, which have implications for returns.
Securities offered through Growth Capital Services, member FINRA, SIPC, Office of Supervisory Jurisdiction located at 582 Market Street, Suite 300, San Francisco, CA 94104. Potential returns and appreciation are never guaranteed and loss of principal is possible. Please speak with your CPA and attorney for tax and legal advice.
Dwight Kay is the Founder and CEO of Kay Properties and Investments LLC. Kay Properties is a national 1031 exchange investment firm. The www.kpi1031.com platform provides access to the marketplace of 1031 exchange properties, custom 1031 exchange properties only available to Kay clients, independent advice on sponsor companies, full due diligence and vetting on each 1031 exchange offering (typically 20-40 offerings) and a 1031 secondary market.
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