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Tag: real estate investing

  • Investigating a Critic of Real Estate Investing

    Why Rental Properties Are Not Good Investments

    While real estate continues to be the biggest asset class in the world, there are still asset managers who are skeptical about recommending it to their clients as an investment vehicle. As Andy Rachleff puts it:

    One of the most common pieces of financial advice our clients hear from their friends and family is to invest their excess cash in rental properties. Unfortunately, this is terrible advice for all but a lucky few.


    Andy Rachelff

    The piece goes on to give four distinct reasons for critics’ deviation from traditional logic. Let’s break it down one by one.

    Income Isn’t Guaranteed

    While this is true, this is true when it comes to any financial investment vehicle. According to the National Council of Real Estate Investment Fiduciaries (NCREIF), as of Q1 2021 the average 25-year return for private commercial real estate properties held for investment purposes slightly outperformed the S&P 500 Index, with average annualized returns of 10.3% and 9.6%, respectively. Residential and diversified real estate investments also averaged returns of 10.3% (NCREIF). Keep in mind, this data takes into account both the 2008 financial crisis and the COVID-19 pandemic. Each calamity gravely deflated assets in the real estate market. So while it’s certainly true that income isn’t guaranteed, over a 25-year period both commercial and residential real estate holdings outperformed the S&P 500 Index. While income is almost never guaranteed, this should make you feel more at ease about investing your money in the real estate sector.

    It’s Hard To Generate A Compelling Return

    Another generic statement that can be said about almost any investment vehicle. If generating a compelling return was easy, everyone would follow the same system. When you invest in real estate, whether it be through direct property management or a REIT, you still maintain some level of ownership over a physical asset. Conversely, with stocks, as an example, you own a piece of a publicly traded company that has a board of directors, executives, and senior management controlling the day-to-day operations. In other words, your money is in the hand’s of others. With the majority of real estate investment vehicles, you are in control. Therefore, you are the one who has the ability to make decisions that generate a more compelling return, versus leaving those decisions in other people’s hands. It’s easier to generate a compelling return when you have control because at the end of the day, no one will care as much about your money as yourself. Additionally, the under 8% net over eight years earned by Weatherfront’s portfolio is not only a logical fallacy as it is only one data point, but their complaint is largely surrounding the tax structure of rental properties investors will have to pay. It is anecdotal data tailored to disprove a very generic argument to begin with.

    It’s Better To Diversify Your Portfolio

    In this section, the writer essentially makes a compelling argument to investing in a REIT versus direct real estate investing. While we’ve covered both strategies in depth, it’s true that in the long-term a REIT, REIG, or some form of pooled investment will mitigate your portfolio’s risk. This is especially true for individual properties that “fall out of favor”, sometimes due to external factors (i.e. COVID-19 pandemic). The writer correctly points out the substantial risk in a situation where you have enough capital to invest in only one property and advises you against it, but then makes a perfect argument for how to actually diversify your capital within the real estate market. After all, diversification is cited by a vast majority a major benefit to the real estate investment sector. Irrespective of how much money you have to invest upfront, you have control over how much risk you want to take on. Therefore you can choose to diversify your real estate portfolio, or you can put all your eggs in one basket. We are in agreement with Weatherfront that the latter generally isn’t advisable.

    Liquidity Matters

    Depending on what approach you take to real estate investing, the writer has a point. If you take a direct approach to real estate investing, you can easily get stuck with an undesirable property. Alternatively, investing in a real estate index fund, gives you the same liquidity as investing in any other index or stock. Nowadays, it’s very rare to see an investor take all their excess investment capital and tie it down in one property. If they do, they’re doing so at their own peril. With so much data available that shows national long-term economic growth is cyclical, one would have to have a very high appetite for risk to directly invest in a single property. Diversification has been proven to be an essential component to any successful investment portfolio.

    Concisely, do we agree with the critic’s assertion to avoid investing in real estate holdings? No, we don’t. While the writer points out some opportunities to improve your real estate investment strategy, they don’t provide a compelling argument to avoid investing in the entire segment. While some data is anecdotal and some is actual, they make a good case to be wary of rental properties. At the same time, they make a great case for diversification through REITs and other real estate index funds. The fact is there will always be critics and skeptics of any investment choices. There are analysts who are paid to do just that. However real estate has been the world’s largest asset class for awhile and it isn’t going anywhere. For investors, it would be wise to embrace that and research the abundant amount of strategies available within the real estate segment. Diversification will always be critical. Especially if you’re not currently invested in the real estate market, it would be prudent to look into various strategies because you’re all but sure to find some that suit either your short or long-term goals.

  • The Future of Capital Markets Technology

    Capital Markets are where savings and investments are channeled between suppliers, people, or institutions with capital to lend or invest — as well as those in need (Hayes, Investopedia). Suppliers typically include banks and investors while those who seek capital are businesses, governments, and individuals. Capital markets are composed of primary and secondary markets.

    The most common capital markets are the stock market and the bond market. However other, more complex, markets include the CRE (Commercial Real Estate) Market, Equity Capital Market (ECM), as well as many others that are typically geared towards a specific investor. Therefore there is not as much trading volume or frequency, since the broader excitement is not the same. Even though real estate is the world’s largest asset class, we’ve seen a recent decline in CRE investment. Medium recently posted an article detailing the advantages of a platform called Beacon Platform, Inc, which was a critical, major acquisition for Centena.

    Medium: Modernizing the Capital Markets Technology Stack: Centana’s Investment in Beacon Platform, Inc.

    Why do customers choose Beacon?

    Time-to-Value and ROI. Today, companies continue to deal with cumbersome internal applications that have been stitched together, often with legacy code and/or 3rd party vendors in the Trading and Risk Management space, which are “black box” and difficult, if not impossible, to alter.

    Beacon’s entire code base is flexible and transparent (i.e. the code is made available to customers) and seamlessly integrates with existing software and other 3rd party solutions (like Murex and Calypso), or in-house proprietary solutions, which helps drive quick time-to-value and high utility.

    In a fraction of the time and cost of alternative solutions, Beacon has helped customers achieve objectives such as migrating workloads to the cloud, expanding into new markets, upgrading legacy code by placing it within a modern developer wrapper and extending analytics and applications to customers’ end-users.

    -Matt Alfieri
    Key Takeaways

    When it comes to capital markets technology, the evolving nature of the tech space all but ensures we will see new technologies introduced into capital markets operations. Additionally, while this may sound like an advertisement for Beacon (though FinYork has absolutely no affiliation to it), the critical feature to note is this is an exemplary illustration of where capital markets technology appears to be heading.

    Vertical SaaS or cloud industry solutions, instead of legacy or proprietary in-house solutions, are showing us that they’re easier to replace than many executives originally thought. You should expect to see a similar effect here as with PropTech, as it becomes more widely available and accepted by savvy executives and high net worth real estate investors. You definitely do not want to be the firm who is continuing to use antiquated capital markets technologies. This puts you at an immediate, huge disadvantage. It makes it that much harder to catch up with your competitors, who have a leg-up as they’ve already implemented innovative technologies.

    All this goes to say that SaaS, digital transformation, cloud technologies, PropTech, and even niche technologies that aim to improve efficiency in capital markets are going to play an integral part of the future. The success of firms who will adapt them largely depends on the success those firms will have in the implementation process. To be sure, capital markets technology is only going to continue getting more efficient, robust, and easier to adapt.

  • The Future of Capital Markets Technology

    Capital Markets are where savings and investments are channeled between suppliers, people, or institutions with capital to lend or invest — as well as those in need (Hayes, Investopedia). Suppliers typically include banks and investors while those who seek capital are businesses, governments, and individuals. Capital markets are composed of primary and secondary markets.

    The most common capital markets are the stock market and the bond market. However other, more complex, markets include the CRE (Commercial Real Estate) Market, Equity Capital Market (ECM), as well as many others that are typically geared towards a specific investor. Therefore there is not as much trading volume or frequency, since the broader excitement is not the same. Even though real estate is the world’s largest asset class, we’ve seen a recent decline in CRE investment. Medium recently posted an article detailing the advantages of a platform called Beacon Platform, Inc, which was a critical, major acquisition for Centena.

    Medium: Modernizing the Capital Markets Technology Stack: Centana’s Investment in Beacon Platform, Inc.

    Why do customers choose Beacon?

    Time-to-Value and ROI. Today, companies continue to deal with cumbersome internal applications that have been stitched together, often with legacy code and/or 3rd party vendors in the Trading and Risk Management space, which are “black box” and difficult, if not impossible, to alter.

    Beacon’s entire code base is flexible and transparent (i.e. the code is made available to customers) and seamlessly integrates with existing software and other 3rd party solutions (like Murex and Calypso), or in-house proprietary solutions, which helps drive quick time-to-value and high utility.

    In a fraction of the time and cost of alternative solutions, Beacon has helped customers achieve objectives such as migrating workloads to the cloud, expanding into new markets, upgrading legacy code by placing it within a modern developer wrapper and extending analytics and applications to customers’ end-users.

    -Matt Alfieri
    Key Takeaways

    When it comes to capital markets technology, the evolving nature of the tech space all but ensures we will see new technologies introduced into capital markets operations. Additionally, while this may sound like an advertisement for Beacon (though FinYork has absolutely no affiliation to it), the critical feature to note is this is an exemplary illustration of where capital markets technology appears to be heading.

    Vertical SaaS or cloud industry solutions, instead of legacy or proprietary in-house solutions, are showing us that they’re easier to replace than many executives originally thought. You should expect to see a similar effect here as with PropTech, as it becomes more widely available and accepted by savvy executives and high net worth real estate investors. You definitely do not want to be the firm who is continuing to use antiquated capital markets technologies. This puts you at an immediate, huge disadvantage. It makes it that much harder to catch up with your competitors, who have a leg-up as they’ve already implemented innovative technologies.

    All this goes to say that SaaS, digital transformation, cloud technologies, PropTech, and even niche technologies that aim to improve efficiency in capital markets are going to play an integral part of the future. The success of firms who will adapt them largely depends on the success those firms will have in the implementation process. To be sure, capital markets technology is only going to continue getting more efficient, robust, and easier to adapt.

  • Key Players in the CRE Market

    Many property types within the Commercial Real Estate (CRE) market are generally agreed to have had a poor performance the past few years, largely due to the COVID-19 pandemic restrictions. Particularly, office and retail property types. The real question investors are asking themselves is whether or not it has the potential for an emphatic return, or if a commercial real estate focus is not likely to be a great long-term investing strategy. The opportunities for successful CRE investments are still there. There are still plenty of marketplaces exclusively geared towards CRE investment, which have uniquely positioned themselves in the broader real estate investing market.

    Before committing your resources to a given investment strategy, new investors should understand who the market players are for a CRE deal. Below is a thoroughly compiled list of the key players (roles) in the commercial real estate market, which then goes onto provide an additional link to a description of each role.

    Key Players in CRE :
    • Buyer & Seller
    • Brokers: Buy-side and Sell-side
    • Legal Counsel: Buy-side, Sell-side, and Lender Counsel
    • Mortgage Broker
    • Lender/Loan Officer
    • Title Company
    • Capital Partners/Investors
    • Property Management
    • Insurance Provider
    • Appraiser & Surveyor
    • Environmental Consultant
    • Accountant: Buy-side and Sell-side

    The following article shares a useful and detailed look at the key players in CRE. Refer to the link below. It provides key details about the key players in CRE’s marketplace.

    What Are The Key Players And What Are Their Roles In A Commercial Real Estate Transaction

    As a commercial real estate investor, either as a buyer or as a seller, you work with multiple parties to move a deal from discovery through to closing. To manage a deal process efficiently, it is of utmost importance to understand all of the key players in a commercial real estate transaction.

    GerCNergy.com (Administrator)
    https://getcnergy.com/knowledge-base/key-players-in-a-commercial-real-estate-transaction/
    Summary

    The above players all comprise parts of the CRE deal. It is important for a sophisticated investor to be familiar with the various players as they can understand the dynamics of a deal and align with the sponsors who will work with most of the players mentioned.

  • Key Players in the CRE Market

    Many property types within the Commercial Real Estate (CRE) market are generally agreed to have had a poor performance the past few years, largely due to the COVID-19 pandemic restrictions. Particularly, office and retail property types. The real question investors are asking themselves is whether or not it has the potential for an emphatic return, or if a commercial real estate focus is not likely to be a great long-term investing strategy. The opportunities for successful CRE investments are still there. There are still plenty of marketplaces exclusively geared towards CRE investment, which have uniquely positioned themselves in the broader real estate investing market.

    Before committing your resources to a given investment strategy, new investors should understand who the market players are for a CRE deal. Below is a thoroughly compiled list of the key players (roles) in the commercial real estate market, which then goes onto provide an additional link to a description of each role.

    Key Players in CRE :
    • Buyer & Seller
    • Brokers: Buy-side and Sell-side
    • Legal Counsel: Buy-side, Sell-side, and Lender Counsel
    • Mortgage Broker
    • Lender/Loan Officer
    • Title Company
    • Capital Partners/Investors
    • Property Management
    • Insurance Provider
    • Appraiser & Surveyor
    • Environmental Consultant
    • Accountant: Buy-side and Sell-side

    The following article shares a useful and detailed look at the key players in CRE. Refer to the link below. It provides key details about the key players in CRE’s marketplace.

    What Are The Key Players And What Are Their Roles In A Commercial Real Estate Transaction

    As a commercial real estate investor, either as a buyer or as a seller, you work with multiple parties to move a deal from discovery through to closing. To manage a deal process efficiently, it is of utmost importance to understand all of the key players in a commercial real estate transaction.

    GerCNergy.com (Administrator)
    https://getcnergy.com/knowledge-base/key-players-in-a-commercial-real-estate-transaction/
    Summary

    The above players all comprise parts of the CRE deal. It is important for a sophisticated investor to be familiar with the various players as they can understand the dynamics of a deal and align with the sponsors who will work with most of the players mentioned.

  • What’s Holding Back PropTech?

    While PropTech has seen some growth in recent years, more so before the COVID-19 pandemic, we still haven’t seen the manifestation of the scale of technological revolution in the property industry we were once promised. The vast majority of buildings we come across in our daily lives are still operating in traditional ways, using outdated but proven equipment. Let’s dive into why we are yet to see the kind of transformative innovation we were expecting on a broader scale.

    Real estate is widely recognized as the world’s largest financial asset class. However, in today’s world, we often see companies rise to prominence before crashing and burning in a matter of a few short years. Most of the biggest corporations in the world today didn’t have a trace of existence 30 years ago. The real estate asset class could not be categorized more differently. It’s not only the largest asset class (by far), it’s also the oldest asset class (Hagerty, Propmodo). Historically, the property industry is a very slow, cautious sector. Unlike an App, such as Uber for example, buildings and other construction projects take many years from the design process to the completion of the physical structure. This is attributed partially to the reality that protecting buildings and the occupants inside them is paramount. In both the residential and commercial real estate sub-sectors, moving too fast and making a mistake that may lead to a potential building collapse is simply out of the question. Due to real estate’s conservative business model, even the most sophisticated PropTech products are having a difficult time gaining broad, large-scale traction (Hagerty, Propmodo).

    Ernst & Young’s Comprehensive PropTech Study

    An Ernst & Young (E&Y) survey recently found that 43% of those who provide PropTech products are majorly struggling with widespread adoption across a given client’s business. Additionally, the same research discovered that 35% of PropTech providers are seeing a very sizable lack of scaling, as a direct result of their application being adopted. Perhaps the biggest shock from this study is 39% of respondents are yet to adopt even a single PropTech tool.

    In addition to safety concerns, the attitude of business managers has been noted as a key opponent to PropTech’s success. Value in real estate is most frequently determined by three factors: 1) location, 2) size, and 3) finishes [amenities]. Reducing costs and increasing efficiency plays a major role in the construction industry, but we don’t typically see those same levels of concern in asset management. PropTech is actually attempting to change that. With the right technology, savings from efficiency, integration, and automation can start to pile up (Hagerty, Propmodo). Having the ability to tap into data generated by buildings is providing actionable insights that are too big of a potential game-changer to ignore. For individuals or companies that already have a real estate strategy in place, implementing innovative PropTech is only putting them further ahead of the pack. Executives, board members, and direct real estate investors alike clearly understand the need for PropTech. The biggest challenge remains in implementation.

    Conclusions Drawn From Ernst & Young’s Study

    We can conclude from the E&Y study that the remedy starts with ensuring the right people are in place. E&Y found 53 percent of real estate owners don’t feel they have the in-house talent to successfully adopt new technology. It’s worth taking a moment to let that sink in. More than half of executives, or very senior personnel in a position to make these decisions, are not confident in their own teams’ implementation ability. Without technology-minded talent and leadership, it’s hard to see the light at the end of the tunnel. Traditional real estate leadership has often been hesitant – or perhaps more precisely, even negligent – in scrapping outdated systems and processes they’ve relied on for decades. Again, PropTech aims to alter that mindset entirely. Leveraging technology is about focusing on future potential, rather than cost. There are undoubtedly sizable upfront costs associated with widespread PropTech adoption across a portfolio. What makes executives and board members in particular hesitant with implementing PropTech is the mindset about their obligation to stakeholders being centered around cost cutting. Why bother spending money “fixing something” that isn’t broken? Buildings are operating just fine without the need for any sweeping, technological overhaul. That’s the position traditional real estate leadership has taken; they are extremely hesitant to tolerate large capital expenditures on risky, bold technologies that don’t have a clear trajectory of return on investment. Succinctly, from the E&Y analysis we can clearly deduce that executives and board members need to ensure there are enough personnel focused on technology to help senior management understand there in fact is a return on investment from implementing various PropTech products. It’s not as clear-cut, but the long-term financial benefits are there.

    Again, referring back to the same E&Y data, almost 60% of real estate companies surveyed responded that they find new systems difficult to integrate with existing platforms. This is viewed as a further hinderance for executives because this translates to times and resources in order to get things set up, further disincentivizing them by piling on additional costs and additionally clouding the potential return on investment. The rapid pace of development and deployment is leading to piecemeal technology strategies instead of full end-to-end solutions, which is easier for leadership to recognize. As the PropTech industry matures, consolidations, acquisitions, and a wider array of products to service every aspect of portfolios could help solve some of those problems (Hagerty, Propmodo).

    “As investors begin to see the benefit of companies adopting technology, we believe they will help drive the industry forward more rapidly in the same way that investor pressure has encouraged companies to do more and report more on ESG related issues”.

    Mark Grinis, Ernst & Young Global Real Estate, Hospitality, & Construction Leader

    Perhaps an unpopular opinion, but some have compelling arguments that growing pains in PropTech industry is actually a good thing. The real estate industry was stagnating for decades, perhaps centuries. In a few short years, technology has worked its way into practically every executive conversation or board member meeting. With that being said, retrofitting existing buildings will not be a viable solution for every – or most – property owners.  Building technology into the bedrock of the property industry is a ground-up exercise, literally, which makes taking stock of progress that’s been made that much more important. That’s where PropTech comes in. There’s plenty of obstacles in the industry slowing down PropTech at the moment, but there’s no stopping it, especially it in the long-term as we’ve seen companies rapidly expand cloud and digital transformation technologies.  

  • NYC’s Real Estate Market Outlook as the CDC’s Moratorium on Eviction Expires

    When the CDC (Center for Disease Control and Prevention) last extended the eviction moratorium a third time, due to the COVID-19 pandemic, from the end of June 2021 to the end of July 2021, they were clear that would be the final extension. Republicans opposing another extension of the eviction moratorium cited the recent 5-4 decision by the Supreme Court, which suggested legislative approval would be required. Leading Democrats responded with brief arguments that the eviction ban needs to be extended, as Congress has only distributed $3B out of the $46.5B in approved rental relief. According to a study by the Aspen Institute, more than 15 million people in 6.5 million US households are currently behind on rental payments. The same study estimates the collective cost to landlords to this point has been over $20B. Landlord groups previously came together in an unsuccessful attempt to end the moratorium earlier, arguing the CDC overstepped their legal authority, but they were rejected by the Supreme Court’s ruling then. Determined not to give up, the National Apartment Association (NAA), with 82,600 members that collectively manage more than 9.7 million rental units, sued the U.S. government on Tuesday July 27th, seeking billions of dollars in unpaid rent due to the moratorium (Shepardson, Reuters).

    While opportunities for a federal extension essentially ended when the House of Representatives adjourned Friday July 30th, effectively giving up, there are states that have already extended the eviction ban. New York and California top the list, with the two states passing bans on evictions until August 31st and September 30th, respectively (Shepardson, Reuters). Keep in mind, the justification for the CDC initially issuing this policy was due to the federal government’s direction to self-quarantine during the worst of the COVID-19 pandemic. It was not primarily over economic concerns, as that would be outside the CDC’s purview. Regardless, assuming nothing changes from this point, New Yorker’s in financial crisis will only have one additional month of safe haven before they too will have to deal with the reality of federal protections stemming from the COVID-19 pandemic ending.

    What does the looming end of the eviction moratorium mean for NYC’s real estate market? Firstly, as predicted by several well-known real estate attorneys, there will be a huge backlog of cases in Housing Court. Prior to the pandemic, during routine economic and geopolitical times, evictions could take anywhere from three to six months – considered typical – or sometimes drag out for years on end (Hogan, NY Post). The backlog will in turn lead to some landlords, who have certainly been financially struggling throughout this ordeal, being forced into foreclosure or given no choice but to sell cheap to cash buyers. Landlords need revenue in order to run a building. They have expenses, such as providing heat, paying personnel and staff, building supers and contractors, as well as real estate taxes to boot.

    If you’re one of the savvy, fortunate investors who came out of the pandemic with a solid amount of disposable income set aside for your portfolio’s growth, a direct real estate investing approach could prove to be extremely rewarding. REIGs (Real Estate Investment Groups) can also become a powerful force in NYC’s residential real estate market in particular, once the moratorium ends. This vehicle gives real estate investors the ability to join together and pool both their money and knowledge to invest in multiple residential real estate properties. Similarly, members of the REIG would share the costs associated with property management. They could also benefit from diversification and economies of scale, which are additional benefits to joining a REIG. The bottom line for NYC is once the eviction moratorium does end, you’ll see solid opportunities for a long-term residential real estate investment. As is usually the case with financial markets during times of uncertainty, there’s definitely opportunity, but with that opportunity comes inherent market risk.

  • Investing in a REIT: The Pros and Cons

    One of the most notable investment opportunities available to investors looking to enter the real estate market is a REIT (Real Estate Investment Trust). A REIT is a publicly traded company that owns, operates, or finances income-producing properties and real estate investors are able to purchase shares in them (Ranchers, Investopedia). This contrasts to direct real estate investment, which is typically considered purchasing a property, then either managing it, renovating it, renting it out, flipping it, etc. The primary difference centers around whether you’d prefer a hands-on approach to real estate investing. REITs give you the opportunity to diversify your portfolio and more specifically, your investment portfolio within the real estate segment.

    A typical REIT has publicly traded shares that can be purchased on a national exchange, however they often fund underlying properties directly. Such companies, known as Equity REITs, are typically involved in the construction of office buildings, or the management of apartments, hotels, etc. Conversely, Mortgage REITs may purchase asset-backed securities or make direct real estate loans. REITs must register with the SEC, and they’re subject to various regulations, most notably the requirement to pay 90% of the company’s taxable income in the form of shareholder dividends each year. Contrary to popular belief, there are also REITs that are not traded on an exchange, but they likely come with hefty fees, and far more limited liquidity options. Concisely, perhaps the most important takeaway from a REIT is that it provides access to a diversified pool of real estate investments that are essentially impossible for the typical investor, even a large-scale investor, to create on their own.

    The Pros of a REIT

    The biggest pro commonly referred to is a REIT gives a typical retail investor – who may not have enough liquid capital – to take a diversified approach to the real estate market. REITs may also be beneficial to investors that don’t have the expertise yet to assess the risks of a real estate investment. These investors may very well prefer a pooled approach to real estate. In case those cases, a REIT would be a great alternative to direct real estate investing, which would require a lot more experience and intricate knowledge of the real estate market. Investors not only get access to an income-producing product, but additionally to one that’s physically managed by a professional real estate market expert.

    Equity REITs, which are traded on national exchanges, have low capital requirements because investors are only buying a share of the trust. Since it’s traded on a public equity market, an investor can buy and sell these assets with relatively few liquidity constraints.

    Additionally, as we all know, investors are always cognizant of their tax rate, especially from capital gains investments. REIT investors are taxed more favorably on income from the investment because income is not typically taxed at a corporate level, due to the income from these pooled real estate assets being “passed through” to the investor. Contrary to a large corporation where all income is taxed before distributing dividends, REIT investors receive profits as ordinary income.

    Lastly, real estate investors may not always have a bullish position on the overall market and even more so on a specific project or space. Taking a short position on a real estate project, without utilizing an Equity REIT, would require considerable savvy, as well as most likely the use of expensive derivative products. In contrast, REITs allow market speculators to go long or short, depending on their market view.

    The Cons of a REIT

    As this section will conclude, there are definitely more pros than cons to investing in a REIT. As is often the case, one of the primary cons is the opposite of one of the main pros. Since REITs are a massive pool of assets, this makes understanding the underlying risk quite difficult to an average investor in the real estate market. Though the properties are thought to be managed by seasoned professionals, they aren’t exempt from making errors on occasion. The average investor may overlook an essential aspect of the REIT because they’re working under the assumption it’s managed by real estate professionals, or they may struggle to gain a comprehensive understand of the portfolio beyond simple summary statistics.

    Additionally, while this ties in partially with the investor’s preference of direct vs. passive real estate investing strategies, REITs can also be more expensive than a direct lending approach. As an example, fees charged for a REIT managers’ salaries can eat into the potential income gained from the investment. Savvy and wealthy investors with enough capital to diversify could definitely put themselves in a position to achieve higher returns by managing assets themselves. The issue becomes what constitutes “enough”. Should a single investor choose the path of diversification within the direct real estate investment market, “enough” would likely mean tens, if not hundreds of millions. Even so, they would have to incur management costs and while they may be lower than a REIT managers’ salary, the risk incurred would be unlikely to offset the potential capital gains benefit. This is why REITs are far more common and much more likely to be a better tool for investors who are seeking to diversify their portfolio, as opposed to diversifying their real estate portfolio with expensive and frequently reoccurring direct property investments.

  • Homebuyers: Five Tips for Financing and Budgeting

    When it comes to home buying, there’s a well-known critical rule: Avoid purchasing more house than you can afford. However, what represents “affordable” will differ between homebuyers. Therefore, one of the most important things for a first-time home buyer to do is plan and budget in advance. Diving into a potential multi-decade financial commitment is one of the most daunting experiences for an individual (or a couple, for that matter) in their lives. It is also highly probable that it will be your most expensive purchase. Before doing so, strategically allocating your money is essential. Otherwise the costs are steep. Before you know it, you may quickly find yourself getting buried in financial hardship, or the ultimate worst nightmare: foreclosure. To avoid this, we recommend the following five tips for first-time homebuyers.

    1. Strongly consider getting started with the “28 Percent Rule”

    The “28 Percent Rule” dictates that your mortgage shouldn’t be more than 28% of your gross income each month. While the Federal Housing Administration (FHA) recommends a slightly more generous allowance of 31%, first-time homebuyers in particular ought to air on the side of caution, considering they are likely repaying some other forms of debt. Additionally, there are the normal monthly expenses (food, transportation, healthcare, etc.) that any working-class individuals would have to account for.

    2. Your down payment should dictate your home’s budget

    Generally, lenders will look for homebuyers to put at least 20% of the property’s purchase price in cash. Though you can utilize other resources to obtain an approval, such as private mortgage insurance (PMI), this will inflate your monthly mortgage payment by roughly 1% (Fuscaldo, Investopedia). It’s important to note that the PMI depends significantly on the size of the property, your credit score, and the potential for the value of the home to increase over time. It’s equally important to note that it is in your long-term best interest to avoid these kinds of instruments, as they’ll tie up more and more of your monthly disposable income in interest repayment. On top of everything else, it’s critical to remember closing costs, as they’ll cost you anywhere from 2-5% of the home’s purchasing price, depending on what state you live in (Fuscaldo, Investopedia). Avoid over-leveraging yourself. Put as much money down as you can afford to, but certainly aim for higher than the bare minimum 10%.

    3. Precisely track your debt-to-income ratio

    It’s a very well-known fact that mortgage lenders will look at a prospective homeowner’s debt-to-income ratio when determining if they will extend a loan to the borrower. Therefore, keeping track of this ratio on a monthly basis is a good benchmark for prospective homeowners to calculate themselves, in order to ultimately decide if a home they’re interested in is affordable. Suppose your gross monthly income is $5,000. Then, if your mortgage payment is $1,500 and the total of your other monthly financial obligations is $1,000, this puts your debt-to-income ratio at 50%. Qualified mortgage lenders very rarely will approve a borrower with a debt-to-income ratio above 43%. Thus, in the above example the hopeful homeowner would unlikely to get approved and even if they did, it’s probable they would be setting themselves up for failure.

    4. Don’t forget all homeowner expenses, not just the monthly mortgage

    There’s no question getting approved for a home loan is an essential step in the process, yet this is only one obligation (though it’s by far the largest). The tough reality is your monthly mortgage payment will not be your only reoccurring expense as a homeowner. Consider additional monthly homeowners’ insurance, utilities, repairs, and maintenance costs. Depending on the season, the snow will need to be shoveled, or the lawn will need to be mowed, or the shrubs will need to be trimmed. Many find that over time, the list just keeps growing. When you calculate the affordability of a home, you may find that an affordable $1,500 monthly mortgage payment is no longer palatable when you factor in an additional $1,000 in monthly expenses. This is a large reason behind the idea of putting a considerable downpayment on the home; it frees up money for those other monthly costs, rather than irresponsibly squandering it on interest.

    5. Settle on a property you can handle managing

    Not only are the additional monthly homeowner expenses important to factor in, but you also need to be mindful of the condition and size of the property. In a situation when you’re concerned about a large utility bill from heating or cooling, less is more. A 4,000-square-foot property that needs serious repair may be a tempting proposition, until it breaks the budget. You may find you’re better off financially with more of a picturesque small home on a quaint hill, in a quiet neighborhood instead. For your own benefit, have a construction or homeowner expert look into the homes specifications to ensure you haven’t missed anything vitally wrong.

    The bottom line is that to many, home ownership is still considered to be the American Dream. In reality, it can quickly turn into a financial nightmare when you miscalculate your monthly expenditures. First-time buyers in particular often want more than they can take on at that moment. Without taking the time to properly prepare for the single biggest purchase of one’s life, they can find themselves house-rich and cash-poor, leading to ultimate financial misery. We urge any future homebuyers to take the necessary preparation steps. Do not sign up for a dream you are not exceptionally confident you can afford.

  • Homebuyers: Five Tips for Financing and Budgeting

    When it comes to home buying, there’s a well-known critical rule: Avoid purchasing more house than you can afford. However, what represents “affordable” will differ between homebuyers. Therefore, one of the most important things for a first-time home buyer to do is plan and budget in advance. Diving into a potential multi-decade financial commitment is one of the most daunting experiences for an individual (or a couple, for that matter) in their lives. It is also highly probable that it will be your most expensive purchase. Before doing so, strategically allocating your money is essential. Otherwise the costs are steep. Before you know it, you may quickly find yourself getting buried in financial hardship, or the ultimate worst nightmare: foreclosure. To avoid this, we recommend the following five tips for first-time homebuyers.

    1. Strongly consider getting started with the “28 Percent Rule”

    The “28 Percent Rule” dictates that your mortgage shouldn’t be more than 28% of your gross income each month. While the Federal Housing Administration (FHA) recommends a slightly more generous allowance of 31%, first-time homebuyers in particular ought to air on the side of caution, considering they are likely repaying some other forms of debt. Additionally, there are the normal monthly expenses (food, transportation, healthcare, etc.) that any working-class individuals would have to account for.

    2. Your down payment should dictate your home’s budget

    Generally, lenders will look for homebuyers to put at least 20% of the property’s purchase price in cash. Though you can utilize other resources to obtain an approval, such as private mortgage insurance (PMI), this will inflate your monthly mortgage payment by roughly 1% (Fuscaldo, Investopedia). It’s important to note that the PMI depends significantly on the size of the property, your credit score, and the potential for the value of the home to increase over time. It’s equally important to note that it is in your long-term best interest to avoid these kinds of instruments, as they’ll tie up more and more of your monthly disposable income in interest repayment. On top of everything else, it’s critical to remember closing costs, as they’ll cost you anywhere from 2-5% of the home’s purchasing price, depending on what state you live in (Fuscaldo, Investopedia). Avoid over-leveraging yourself. Put as much money down as you can afford to, but certainly aim for higher than the bare minimum 10%.

    3. Precisely track your debt-to-income ratio

    It’s a very well-known fact that mortgage lenders will look at a prospective homeowner’s debt-to-income ratio when determining if they will extend a loan to the borrower. Therefore, keeping track of this ratio on a monthly basis is a good benchmark for prospective homeowners to calculate themselves, in order to ultimately decide if a home they’re interested in is affordable. Suppose your gross monthly income is $5,000. Then, if your mortgage payment is $1,500 and the total of your other monthly financial obligations is $1,000, this puts your debt-to-income ratio at 50%. Qualified mortgage lenders very rarely will approve a borrower with a debt-to-income ratio above 43%. Thus, in the above example the hopeful homeowner would unlikely to get approved and even if they did, it’s probable they would be setting themselves up for failure.

    4. Don’t forget all homeowner expenses, not just the monthly mortgage

    There’s no question getting approved for a home loan is an essential step in the process, yet this is only one obligation (though it’s by far the largest). The tough reality is your monthly mortgage payment will not be your only reoccurring expense as a homeowner. Consider additional monthly homeowners’ insurance, utilities, repairs, and maintenance costs. Depending on the season, the snow will need to be shoveled, or the lawn will need to be mowed, or the shrubs will need to be trimmed. Many find that over time, the list just keeps growing. When you calculate the affordability of a home, you may find that an affordable $1,500 monthly mortgage payment is no longer palatable when you factor in an additional $1,000 in monthly expenses. This is a large reason behind the idea of putting a considerable downpayment on the home; it frees up money for those other monthly costs, rather than irresponsibly squandering it on interest.

    5. Settle on a property you can handle managing

    Not only are the additional monthly homeowner expenses important to factor in, but you also need to be mindful of the condition and size of the property. In a situation when you’re concerned about a large utility bill from heating or cooling, less is more. A 4,000-square-foot property that needs serious repair may be a tempting proposition, until it breaks the budget. You may find you’re better off financially with more of a picturesque small home on a quaint hill, in a quiet neighborhood instead. For your own benefit, have a construction or homeowner expert look into the homes specifications to ensure you haven’t missed anything vitally wrong.

    The bottom line is that to many, home ownership is still considered to be the American Dream. In reality, it can quickly turn into a financial nightmare when you miscalculate your monthly expenditures. First-time buyers in particular often want more than they can take on at that moment. Without taking the time to properly prepare for the single biggest purchase of one’s life, they can find themselves house-rich and cash-poor, leading to ultimate financial misery. We urge any future homebuyers to take the necessary preparation steps. Do not sign up for a dream you are not exceptionally confident you can afford.