Real Estate Investing by Purchasing Shares

There are several kinds of real estate investing that involve buying shares. However, purchase of real estate where there is third-party property management can turn into investment contracts that are regulated by securities legislation. When that happens the business transaction becomes more complex, and the developer offering such investments will be required to comply with a maze of tax and prospective regulations.

REITs:

Real Estate Investment Trusts (REITs) are companies that own many types of commercial real estate, including office buildings, apartment buildings, warehouses, hospitals, shopping centers, hotels and even timberland. Created by Congress in 1962 as proposed by President Eisenhower, the REIT law was part of the Cigar Excise Tax Extension of 1960. REITs were created to give investors the opportunity to invest in large-scale portfolios of income-producing real estate as they would other kinds of liquid securities.

Investment in real estate through REIT regimes has gone global since the 1960s. The spread of the REIT approach now includes more than 30 countries around the world. As of June, 2014, the global index that includes REITs represents an equity market of 456 listed real estate companies with $2 trillion worth of capital. Of that, $1.56 trillion is from REITs.

Investment in REITs sells like stocks on major exchanges. They put investor capital into real estate directly and into mortgages. One major advantages of REITs is that they receive special tax considerations which can help build the return on investment. There are over 300 publicly traded REITs in the United States. The volume of REIT investment has quadrupled over the last three years to over $300 million. On average they yield between 9% and 12% in dividends.

There are three kinds of REITs.

• Equity REITs actually invest in and own their own properties. They draw revenue from property rents.
• Mortgage REITs invest in and buy property mortgages. These REITs loan money to owners of real estate or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by interest earned on the mortgages.
• Hybrid REITs combine the investment strategies of the other two types.

REITs are bought through a brokerage. Commissions on the buying of REITs are usually the same as common stock fees. Although there is no minimum investment for most REITs, you may have to buy them in blocks of 10 or 100 and you will probably need at least $500 to open an account.

Although REITs are generally less volatile than stocks and bonds, they are tied to the value of real estate. In recent years, REITs have seen a decline in value because of the reduced real estate market. However, the investment is quickly recovering.

Crowd Funding:

In 2012, the President signed the Jumpstart Our Business Startups (JOBS) bill Title IV. This legislation technically made it legal for anyone to invest in companies that Forbes called “Ghetto Stock Markets.” In 2015, the Securities and Exchange Commission finally allowed everyday citizens to buy equity investment in crowd-funding of startups and small business, including real estate. Entrepreneurs are now able to start raising real estate investment from “the crowd.” The ruling means that investment can be drawn from “non-accredited investors” (people earning less than $200,000 a year or with a net worth less than $1 million).

The process is very simple. Properties looking for investment are simply listed on crowd-funding websites. Money is invested online. Investors pay only a small processing fee. Various kinds of payment are accepted including bitcoin.

On the other hand, state legislation is still muddying the waters. Statewide crowd-funding laws strictly limit the number of non-accredited investors who can invest, with limited exceptions. Full national participation of non-accredited investors awaits a new revision of the Federal JOBS act.

Real-estate crowd-funding is untried and not much is known about how well it will work. There are no established quality control standards regarding the evaluation and auditing of projects for the investment. There are no secondary markets to buy out crowd-funding markets which makes these investments more risky.

Tax Sale:

Some sophisticated investors are taking advantage of an obscure corner of the real estate market, investing in tax liens. When a property owner fails to pay taxes, the municipality can sell a tax lien on the property. That amounts to the right to foreclose on the property. Investors buy the liens in an auction, paying the amount of taxes owed in exchange for the right to collect back the principle plus between 5% and 36% interest depending on the state. Rarely, if the owner fails to pay the lien by the end of the redemption period, the lienholder can initiate foreclosure proceedings to take ownership of the property.

The interest rates make tax liens an attractive investment. However, this is not a user-friendly form of investing. The value of the tax lien almost completely depends on the value of the real estate. It’s complicated and you have to understand the details. If the property is damaged or un-marketable, the tax lien investment may be worthless.

You can buy tax lien investments as part of small investment groups, through large hedge funds and even pension funds which participate in tax lien auctions. However, the effect of large investors entering the market is that the interest rates on the liens have dropped to make the liens far less attractive.

The Deed XChange is an online dashboard that helps buyers and sellers of find and complete tax deed transactions. Please Contact Us to learn more.