Many Americans don't have
enough cash to play the game of real estate. But Wall Street offers an
alternative way in, kind of. Investors call them REITs. A REIT is a real estate
investment trust, and you can actually buy a stock of
that on the stock exchange. It is publicly traded. It is a way of investing
without buying a house. But REITs can cover much
more than housing. Jenny you have a ton of
REITs. Here's what's in my
portfolio. Government properties, storage,
billboards, standalone box doors. There is enormous
opportunity. Real estate investment
trusts control as much as $4.5 trillion in real
estate in the United States. It's why a lot. Of high net worth
individuals like real estate in their portfolios, the
tax efficiency of it provides diversification,
provides yield, it provides inflation. Protection rights, have
quietly closed historic deals across the country in
recent years. Estimated 150 million people
in United States alone own REITs, either in their
retirement account, in their mutual funds, through their
brokers. Et cetera. So everybody is
exposed to it. They just don't know it. This gives Wall Street funds
a say over what gets built and how. It's in order to acquire the
loan and to get the financing. The REIT is
going to insist on certain amenities. It may insist on
certain insurance coverage, and they're building in
areas where heretofore it was an area that wasn't
seen as, let's say, prime. I mean, this building cost
called $150 million. I didn't actually have $150
million in my checking account and then wrote the
check for it. We had to go to banks and
investors and raise the money. Having reached there
as a likely exit helps the market and helps the
availability of financing. The rapid growth of REITs
have concerned some experts. When you build a property
and then sell it to a real estate investment trust
that is controlled by Wall Street, it puts a lot of
pressure on the tenants. There are quarterly
reports, there are profit margins that have to be
met. That means most likely that
the properties that they're selling off, if they're
rentals, will just increasingly become more
expensive. How have REITs changed the
US real estate industry and are they an effective
alternative to buying a house? Let's begin with the
real estate part of REIT. A house is the classic way
for Americans to get into real estate. You invest in
a single asset and hope it goes up in value over time. Reits are a fundamentally
different concept. You're not exposed to one
house, you're not exposed to 20 houses. You're supposed
to 20,000 of them. Most individual investors
will say, well, maybe they own their house and that's
their real estate. But occupied real estate
serves a different purpose in one's investment
portfolio versus investment properties. So REITs are a
way for individuals to get that access. You have to be very smart
with your strategy. You have to know about
legislation. You have to know about taxes, because
these decisions typically run 5 to 10 years. Over time, the number of
rights and the variety of what they offer has grown. Back in the 1960s, 70s, 80s,
maybe there were 3 or 4 different types. It was
your office REITs, some hotels, industrial and
multifamily. Now there is I can count at
least 20 different types. Your casinos are rich, your
single family homes are reached, the data center
where your servers are located, or REITs. Digital Realty Trust is one
of the big ones in data centers. And that's such an
interesting area because you're seeing AI, you're
seeing the cloud, so much investment in that. So, you know, that's going
to be a big growth sector. Over the past ten years. Self storage and industrial
REIT funds have delivered big returns. By comparison, timber,
retail and office funds underperformed when it
comes to residential housing. These funds have
performed well, too. Most REITs focus on
apartment complexes and specialty districts. That gives them some level
of comfort in being able to be sort of leaders in
building communities, because ultimately what
you're doing is you're profiting. You're also
building community by developing newer assets. In the United States. Home prices have increased
over 18% in the past decade after adjusting for
inflation. Much of that is due to
limited supply. Back in 2018, when there was
a lot of meltdown, a lot of real estate owned Rios on
the market from houses, individual owned houses and
rates looked at it and they said, you know, this is an
opportunity for us to fulfill a market demand
that heretofore was unrecognized, and we think
that we can do it at a lower price point because their
expertise is in managing rental properties. There are only two
residential single family rental rates, and that's
American homes for rent and invitation homes. They were landlords. That is, they would buy up
homes and then they would rent them out. What they're
doing a lot more, though, now is building these homes
for rent. So you're seeing a lot of
single family, new rental homes. There are so many
people now who, because of higher interest rates,
can't afford to buy a home, but they still want that
single family home in a community with the backyard
and the good school district. So they're
getting into these single family rental homes. We really expect that to be
a growing segment of the rental market business
going forward over the next ten years. Many REITs are backing
projects that reshape entire neighborhoods within cities
and their suburbs. They do a lot of mixed use,
like having grocery located near their properties, and
they do that out of a concerted effort to be able
to analyze the market demand to go in and do
noncompetitive submarkets. So something that you build
in the villages down in Orlando may look
differently if you build it in Tulsa, Oklahoma. Initially, this market was
looked at to see that the boomers who were retiring
really didn't want the maintenance of a home and
wanted to move into a rental. That has since
transpired that different demographic groups are
really looking at this from Generation Z to millennials
to Xs to boomers all like this concept. But for lower income
Americans, Wall Street's preference for high end
housing could be creating issues. Properties under
professional management that are owned by corporations
have faster rent increases and also higher vacancy
rates. They have these algorithms
that tell them, you know what, we should keep prices
artificially high. And if we don't have a
person here for a month or two, that's okay because
we're eventually going to get somebody at that higher
price because people are just desperate for housing. The area where we're in a
real crisis is at the low end of the market, you
know, building new luxury apartments that are renting
for $2,500 for a studio isn't going to fix that
problem. So that's the real estate
part of REIT. And now the investment
trust bit. Investment trusts can
deliver powerful tax benefits if they're set up
well. Trust that invest in real
estate tend to pay out large dividends. Rates were meant to provide. Regular income as an
entity, which meant that 90% of their profits needed to
go back to the shareholders as dividends. In the 1960s, Congress
introduced the so-called REIT rule key provisions. The funds need to focus on
real estate, and they need to send most of the profits
back to shareholders. We currently pay about a
5.3% dividend yield that in its own right is a nice
yield. But when you look at the
after tax equivalent of that yield, it is very
compelling. Real estate can be a very
tax efficient asset class because the investor gets
to deduct the depreciation. The depreciation from our
properties has covered 100% of the income and cash
generated by those properties and there's no
tax owed on that dividend. High dividend REIT funds
grew tremendously in the low interest rate era, which
sped up debt driven businesses and kicked off
fierce rounds of housing inflation that haven't
abated in. A very low interest rate
environment like we've seen. It was an alternative for
investors to get a high dividend, which they
weren't going to be able to do due to inflation. Some Democrats in Washington
believe Wall Street REITs have too many advantages in
the modern real estate market. They're making it harder for
people to buy their first house because they're
competing with big Wall Street firms. Second, they're making it
harder for local communities to have local landlords. Now, instead of having a
landlord who you can talk to down the street, if you are
late on a rent payment, you're basically paying
rent to Wall Street. Yes, there are changes that
are being requested, but I think at the same time,
it's those kind of tax codes and that kind of investment
that has made the commercial real estate grow since the
1980s. The Wall Street area gauging
the financial health of the nation. Experts believe rights are
becoming more central in commercial real estate, the
third largest asset class in the United States. So by default, you know,
rights being the more efficient and preferred way
of owning real estate should get a lion's share of that
because, you know, the amount of capital that's
raised to invest in REITs or commercial real estate in
general is to the tune of $300 billion. I'd say it's a matter of
when, not if that. The activity picks up
really fast. Reits do provide liquidity
to the real estate market. For example, KKR bought
this massive complex on the outskirts of Philadelphia
from the Post Brothers in 2022. When it comes to multifamily
investments, very focused on how attractive is this
property as a place to live for individuals. And then the other thing
that we look to is how attractive is a given
market in terms of are people moving to that
market? And Philadelphia is an example of a market that
we think has great long term prospects. The biggest sale in
Philadelphia of an apartment before we sold Presidential
City ever had been like $250 Million. What really helped
that transaction happen was that it had an assumable
loan. We sold it in the fall of last year. Interest
rates had already moved up significantly. Today, if
there's not an assumable loan on a property, people
cannot pay anywhere near the pricing they would have
paid two years ago because their cost of capital is so
much higher. Lots of new homes for sale
in the US may come from this cohort, especially as many
people cling to low mortgage rate homes bought in the
pandemic. Policymakers in Washington
hope to give families more even footing in a market
increasingly filled with Wall Street's real estate
trusts. Buying a house is still one
of the primary factors of building wealth in the
United States. But at the same time,
there's a rising demographic change, especially among
the Zs, that says that may not fit for us. We do have real estate
developers that want to maximize their profits, but
I think we need to think about how do we do
equitable growth. And I think that's the key
for our cities Right now in America, we don't have a
lot of equitable growth.
