Your Investments: Invest in real estate for durable income

Today, I would like to focus on an asset that doesn’t get much attention, but just may deliver the income that you need.

By AARON KATSMAN
March 5, 2015 05:03
3 minute read.
Money

Money [illustrative]. (photo credit: REUTERS)

 
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Real-estate investing, even on a very small scale, remains a tried and true means of building an individual’s cash flow and wealth. – Robert Kiyosaki

It’s no secret that in today’s low interest rate environment, retirees are having all kinds of trouble finding ways to generate enough income to meet their expense needs. It used to be that you could stick money into a government or a highly rated corporate bond and get a respectable return. Today, those same vehicles will generate virtually nothing. To get 2 percent on a corporate bond means that you will need to either invest for a very long term or take a lot more risk in the bond you choose.

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I’ve written many columns extolling the virtues and risks associated with emerging market bonds, high dividend paying stocks and other income producing investments. Today, I would like to focus on an asset that doesn’t get much attention, but just may deliver the income that you need.

Non-Traded REITs

There is a fourth asset class that hasn’t gained as much attention: commercial real estate. Most investors don’t have the wherewithal to go out and buy a hotel or a shopping center. As such the thought of investing in commercial real estate doesn’t seem all that relevant. But thanks to Non-Traded REITs (NTRs) individuals can gain exposure with reasonable investment minimums.

NTRs are investments in real estate investment trusts that don’t trade on any stock exchange. Unlike, other publicly traded real estate, NTRs don’t come with the same fluctuation in principal that you find in other REITs. NTRs have become popular because of the high level of income that they distribute, usually in the 6%-7% range. Many investors who want exposure to US real estate like NTRs because not only do they get a well diversified real estate portfolio with a big yield, but they also get potential for capital appreciation in the real estate held.

NTRs are required to either liquidate or list their shares on an exchange within a specified period, usually at least seven years.



Downside?

NTRs may sound too good to be true. After all what can be bad about getting 7%, potential capital appreciation and no fluctuation in the share price? There are critics to NTR’s who like to point out the less rosy side of the asset. They point to very high fees paid by investors that ultimately bring down returns and the lack of transparency in pricing these assets. Just because there is no fluctuation in the share price doesn’t mean that the actual value of the instrument hasn’t moved, rather, it’s just that no one knows how to price it.

NTRs are required to update their net asset value every year and a half after their offering, and if you look at their own reports to the SEC you will find that in some cases, the share prices have dropped well below their initial price.

Michael McTiernan, a lawyer for the SEC told the New York Times, “One common sales tactic we object to is the suggestion that they are eliminating volatility simply because they don’t tell you what the value is. It’s not that it’s not volatile.

It’s just that you don’t know.”

Many firms have taken these criticisms to heart and are truly changing the industry for the better. Whether it’s providing more transparency, lower fees or taking the bulk of their compensation when a liquidity event has occurred, investors are getting a much better deal than in the past.

NTRs continue to raise impressive amounts of money in relatively short periods of time. The thirst for durable income coupled with potential capital appreciation is an intriguing combination for investors of all types.

NTR’s are not for everyone, but investors in search of yield should research them as they may provide a solution for today’s nonexistent interest rates.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.

aaron@lighthousecapital.co.il

Aaron Katsman is author of the book
Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing, and is a licensed financial professional both in the United States and Israel.

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