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Real Estate: A Versatile Investment Strategy for All
Benefits of Real Estate Investment
Economic studies highlight the potential benefits and advantages of real estate investments compared to other investment options such as stocks. One of the primary benefits of real estate investment is the relative safety compared to some alternatives. While the stock market is known to be volatile, real estate is typically not as volatile and offers higher returns per unit of risk. This makes it an appealing option for risk-averse investors, especially those who are new to real estate investing and have limited capital. Another benefit is that real estate is a tangible asset. While stocks offer liquidity, the value of a physical asset like real estate tends to hold up better over time.
Real estate investments generally appreciate over time, averaging around 5% annual appreciation for single-family homes from 1987 through 2023. In recent years, appreciation rates have jumped. According to the S&P CoreLogic Case-Shiller U.S. National Home Price Index in April 2024, the national average annual gain was recorded at 6.4%. Certain states like Vermont and Rhode Island have seen astounding increases as of Q3 of 2023, which rose to over 13%.
As properties increase in value, investors can benefit from significant profits when they sell. Investors also have the option to utilize a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange for appreciated properties and exchange into higher-quality properties, continuously enhancing the value of their portfolios.
Diversification is another key advantage of real estate investment. By including real estate in their portfolios, investors can spread their risk beyond the stock market. This diversification means that if one investment underperforms, not all the investor’s money is compromised, thereby providing a more reliable return on investment (ROI).
Investing in real estate can be a powerful tool for building generational wealth. Properties can be passed down through generations, allowing families to accumulate and preserve wealth over time. For property inherited by heirs, potential tax consequences and planning options need to be considered.
Real Estate Investment Strategies
Fractional Ownership of Real Estate: TICs and Triple Net Leases (NNN)
Fractional ownership is an investment structure that allows multiple investors to purchase a percentage ownership in an investment-grade asset. Fractional real estate ownership and other alternative investments provide for diversification, and financial advisors will often dedicate 10% of a clients’ portfolio towards such vehicles.
Tenant-In-Common
A Tenant-in-Common (TIC) is a type of investment property structure that has gained popularity over time. In a TIC arrangement, multiple individuals hold shared tenure rights to owned property. Each tenant-in-common possesses a separate ownership interest in the same real property. The benefits of TICs include increased buying power and reduced costs for each co-owner, as well as the shared responsibility for the property managed by the partnership.
Triple Net Lease (NNN)
A Triple Net Lease (also known as NNN or triple-net) is a type of lease agreement where the tenant agrees to cover all property expenses, including real estate taxes, building insurance, and maintenance, in addition to paying rent and utilities. For landlords, NNNs provide a stable source of revenue, as well as alleviates them from being responsible for utility expenses, taxes, repair costs, and property management as these duties are passed to the tenant.
For investors, the benefits of Triple Net Leased properties include long-term, stable income and the potential for capital appreciation of the underlying property. They can invest in premium real estate without the hassles of managing vacancies, improvement costs, or leasing fees. Also, when the properties are sold, investors can reinvest their capital into another triple net lease or other real estate investment without incurring taxes through a 1031 tax-deferred exchange.
A Delaware Statutory Trust (DST) is a legal entity that holds title to real estate assets. A DST offers investors fractional ownership of larger and higher quality properties that they otherwise would not be able to individually purchase. A DST is also an option for those wanting passive ownership, as there are no daily management responsibilities. This investment option also offers diversification in allowing multiple property investment within a single investment. By investing in multiple properties, some of the risk connected to a single property investment can be mitigated.
A trust that invests primarily in real estate, and passes the income, losses, and other tax items to its investors. Investments in REITs are classified as securities, and as such do not qualify for Section 1031 exchange treatment. Real Estate Investment Trust (REIT)
A Real Estate Investment Trust, or REIT, can be another viable option for those who prefer a more passive real estate investment. A REIT is a company that owns and operates income-producing real estate or related assets. A REIT can be thought of like a mutual fund that invests in real estate as opposed to stocks. Assets can include property like shopping centers, office buildings, multi-family housing, etc. Most REITs trade on major stock exchanges, which allow investors the benefit/option to invest in real estate without having to actively manage property.
The purpose of a REIT is to make money for investors through managing, buying, and selling real estate. When a REIT sells an asset, it is their responsibility to investors to replace the asset quickly, often utilizing a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange .
Residential and Commercial Properties
Many entry-level investors start with one residential or commercial property and they continue to grow their portfolios over time.
Residential rental homes are feasible option for newcomers to real estate investing, as they often offer a more affordable investment. Location is a primary concern when deciding where to purchase a rental property, as there needs to be adequate demand and economic stability in order to conduct a successful real estate investment, yet affordable enough to realistically secure a property without major risk. Home prices in expensive, high-value areas such as Seattle average around $880,000, and Washington, D.C., hovering around $625,000. These areas are not as accessible to those starting out in real estate investment, so looking at more affordable cities where the housing market is on the rise is a more viable route. In St. Louis, the average home price is $177,000, and Philadelphia at $225,000.
Let’s look at a scenario of a purchased single-family rental property and its appreciation value over 5 years.
5-Year Philadelphia Appreciation Rate Example:
Current Value: $225,000
Original Price: $168,000
Appreciation rate: 33.92%
($225,000 - $168,000) / $168,000 x 100 = 33.92%
Five years ago, the average home price in Philadelphia was $168,000. Now, it is $225,000. The appreciation rate of the home over 5 years was 33.92%, which breaks down to 6.8% annually. (around the national average). For investors, this is a $57,000 appreciation gain in 5 years in addition to a rental income stream. Additional ways value can be added to a property is through conducting improvements and locational popularity, which can sizably increase the value of a property over time in addition to general appreciation. With this increased value, an investor can utilize a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange for a Replacement Property leveraging the now increased value of their Relinquished Property, thus furthering their investment while deferring capital gains tax as well as other deductions such as mortgage interest, depreciation, property taxes, and operating expenses. Investments in other types of real estate can also provide significant annual returns.
In conclusion, investing in real estate presents an opportunity for individuals of all ages and backgrounds to build and preserve wealth. With its relatively low volatility and higher returns compared to other investment options, real estate is a favorable choice for risk-averse investors and those new to investing. The tangibility of real estate assets, coupled with appreciation potential, makes this a reliable and rewarding investment avenue.
Real estate investments not only offer potentially significant profits and portfolio diversification but also pave the way for building generational wealth. Whether through direct property ownership or more passive approaches like TICs, NNNs, and DSTs, there are various strategies to suit different investment goals and capital levels. Additionally, tax deferral strategies such as Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange s further enhance the potential for returns when looking to grow or diversify a real estate portfolio.
Real estate remains a powerful tool for financial growth and stability, providing numerous benefits and opportunities for both novice and experienced investors alike.
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified A person acting to facilitate an exchange under section 1031 and the regulations. This person may not be the taxpayer or a disqualified person. Section 1.1031(k)-1(g)(4)(iii) requires that, for an intermediary to be a qualified intermediary, the intermediary must enter into a written "exchange" agreement with the taxpayer and, as required by the exchange agreement, acquire the relinquished property from the taxpayer, transfer the relinquished property, acquire the replacement property, and transfer the replacement property to the taxpayer. Intermediary , and as such does not offer or sell investments or provide investment, legal, or tax advice.
