How I’m passively investing now - after 48 years as a real estate investor.

Question

For most of my 40+ years investing in real estate I’ve stuck to direct investment in real property and direct investment in notes, with some limited partnership interests thrown in. The one kinda hybrid has been investing as a limited partner in my own syndications and funds - in which I am heavily invested.

Having a rather FULL perspective of private syndications, I see a real problem for investors in analyzing these investments. Even the syndications that comply with Reg D tend to provide less than enough hard information from which to base a decision. The fact that syndications tend to be for newly acquired real estate, often with a “plan” (as Mike Tyson said “everyone has a plan - until they’re punched in the face”) to “turn around”, “improve”, or “add value” to the subject property. But few sponsors are able to offer long term track records of success with the type of specific property and type of operation being offered.

A further problem is that Reg D requires NO ongoing reporting of financial, market, or operating information. And when things go south, communication often becomes nothing more than terse statements “approved” by the sponsor’s legal counsel. Add lack of liquidity, and investing in syndications can be like entering a fight with your hands tied behind your back.

Now that I’m seeing a near future of being less active in direct investing, I am more and more interested in investing in REITs. If one thinks of these as individual real estate portfolios rather than as speculative stocks, and therefore has the ability to ignore short to intermediate term market fluctuations, I believe they can offer a superior investment opportunity for passive real property investment.

I’ve eliminated all MORTGAGE REITs (mREITs) from my consideration because they’re much too speculative - they borrow 4 - 9 times their capital base. But that leaves 160 U.S. based REITs, and over 900 REITs worldwide.

The way REITs are structured nowadays, more than 90% of them are internally managed, eliminating the inherent conflict of externally managed REITs, and aligning the interests of management and shareholder to a much greater degree. Further, most REITs are specialized, investing in only one particular property sector, and often concentrated in a particular geographic area. A ton of information is available for each REIT, including net asset value, discount or premium to price, historical earnings and cash flow, projected cash flow, historical price movements, etc. I have put together a personal portfolio of 15 REITs covering apartments, industrial, healthcare, net lease, casino, infrastructure, and timberland. The average discount to net asset value is 36% (THEORETICALLY) I paid 64C for each $1.00 of assets); the average LTV utilized by the REITs I invested in is 30% (REITs with LTV above 50% are "suspect") and my dividend yield on the total portfolio is just over 7%.

I’ll let you know how it goes - as any investment risk is inherent.

Let me know what you think?

Ivan Terrero · Answer

Don:

I guess we all go through different phases of life and investing and I hope this new phase works for you. I have been a note investor for the last 10 years or so after being a first a land investor, transitioned to RTO/ SFH, tried tax liens and deeds, small MFH, after atttempting a fix and flip that went south quickly around the same time was doing some private lenfing came to the conclusion that being the bank works best for me. I hold some REITS in my IRA (O, VNQ,MPW among others)

Greg Scott · Answer

I'm not a huge fan of REITs because you don't get the tax benefits of direct ownership.

We also bought an apartment complex from a well-respected apartment REIT and have been appalled at how poorly they managed the asset.  It has taken a lot of effort to get that property on track.  They happen to still own the property next door.  Many of the residents that we evict or non-renew due to poor behavior have moved to that other property.  Good riddance!

I agree with your concerns about syndications. I have found very few syndicators on the street that I would want to invest with.

While I agree that Reg D has no requirements, sometimes the operating agreement does.  I invest in multifamily with a group that has rules about how their syndications are structured.  If you want to stay in the group, you abide by the rules.  Our operating agreements require monthly financials. They also require that the syndicator have a provision by which they can be voted out of their job.  There are other such provisions, and not everyone abides by the rules, but it generally works out better.

John McKee · Answer

@Don Konipol

Are you talking about private or public REIT's?  Give us some examples on why you chose a particular REIT.