Having you own residency can be a sound investment, but it’s not the same as owning income real estate – physical assets that bring cash income. We will look at different methods for investing in properties in order to get income, along with REITs, triple-net leased assets, Delaware Statutory Trusts and renters-in-common assets.
In the previous year, the rate of owning homes in the States arrived at a record post-Great Recession level of around 68 percent. These numbers came from the U.S. Department of Commerce. Even with Covid-19 raging around, the housing marketplace is still pretty robust. Low interest rates have assisted the sector, letting people refinance their mortgages and save cash each month.
Although homeownership is a hefty contributor to the wealth of US citizens, it is no replacement for the possible advantages of investment property. Investment assets may grow in value — the same as your residence—but also possibly gather monthly income while you own them — which differs from your primary residence.
Generating profits is the main reason why so many people diversify their in portfolios so they have various kinds of commercial, net-lease, self-storage, medical and multi-family property assets. Retirees and those near that age can benefit from this bonus income, but other people would, too. Extra monthly rental profits can be utilized for supporting living costs, no matter if the income is saved or reinvested.
Investments in properties that generate a cash flow will possibly create a monthly income for investors. Noticeably, lots of property investments are can be predicted and sustain in their capability to create monthly income—though rental income is never warranted as property is not a bond, but a living, physical asset. During corona, certain assets are doing especially well, like leased assets occupied by key businesses, such as drugstores, medical services and shipping firms, industrial distribution centers that deliver products bought via through e-comm.
There are a number of methods to take part in the investment property marketplace in pursuit of income and appreciation. Here are 4 ways to invest in properties with a potential for income.
Real Estate Investment Trusts (REITs)
The marketplace for publicly traded REITs is a robust one and lots of people have access to it via retirement plans and stock broker accounts. These trusts are typically firms that own and operate properties, so you’re investing in the firm, not just the underlying property. The trusts pay their income in the shape of dividends which are taxable.
The largest disadvantage to such investments (apart from their high correlation with the total stock marketplace and the instability it brings) is the lack of the chance to utilize the 1031 exchange—and thus avoid taxation— on any capital profits from the sale of shares.
Example: Rick invested $100k in such a trust that owns a shopping mall. There is no monthly income offered by the trust, but the firm pays most of its earnings in the form of dividends on a quarterly basis. Dividends are taxable in the form of ordinary income. If Rick sells the shares, if there is a profit, he will pay tax on the profit.
Direct Ownership of Triple-Net Leased Real Estate
These properties are usually retail, medical or industrial premises that one renter occupies. In the case of such assets, the renter — not the owner — is responsible for the majority, if not all, of the maintenance, taxes and insurance costs connected to the asset. While advantages may be potentially enticing, the direct ownership of this kind of real estate arrives with distinct disadvantages, beginning with the concentration risk when an investor puts a big part of their net worth in one asset and with a single renter. Other risks include potential exposure to an event like corona, if the renter proves to be miss, and management risk.
I held a bunch of these assets over my trading career and they aren’t passive – they ask of you to get really involved in order to handle them well.
Example: Maria bought smaller medical offices for $1.5 million. The building is occupied by a firm specialized in radiology. Although the renter pays most of the building’s operating costs, Maria, as the sole owner, is in charge for cooperating with the renter to gather the repayable costs that she has paid, partnering with the renter on any rent relief needed in situations like this pandemic, negotiating with the renter on any lease renewals and lots of similar items. Income from an asset, if there is any, is taxable, though Maria will be able to use depreciation deductions to shelter a part of it. When Maria sells the offices, if there is a profit, she can avoid taxes if she reinvests the profit in another investment firm using a 1031 exchange. The possible negative for Ellen is that if the $1.5 million she paid for the building represents a big part of her total net worth, she is at risk of overconcentration.
Delaware Statutory Trusts
A DST is an entity utilized to hold investment titles like income-generating properties. The majority of properties may be owned by such a trust, along with industrial, multi-family, self-storage, medical and retail assets. Frequently, asserts are of institutional quality like those owned by an insurance firm or a pension fund, like a 500-unit multi-family apartment community in Class A or a 50,000-square-foot industrial distribution facility subject to a 10-to 15-year net lease with an investment grade rated Fortune 500 logistics and shipping firm. The asset manager (also called th Delaware Statutory Trust sponsoring firm) handles assets on a daily basis as well as all investor reporting and monthly distributions.
Delaware Statutory Trust investments are utilized by investors looking for a cash investment of a typical threshold of $25k, as well as those looking for a turnkey 1031 tax-free exchange method.
Example: Terrence has invested $100k in a Delaware Statutory Trust that owns $10 million of industrial assets occupied by a Fortune 500 shipping firm. Each month, the sponsor shall allocate a share of Terrence’s monthly income to him, in cash, if there is some profit. This gain is taxable, albeit partially covered by deductions. When the asset is sold, Richard may defer taxes on any profit if he reinvests the profit in another investment asset or Delaware Statutory Trust via a 1031 tax-avoidant exchange.
Tenants-in-Common Real Estate (TICs)
This is another method for co-investing in properties. With such a property, you hold part of interest in an asset and you get pro rata parts of the possible gains and appreciations of the property. As a TIC investor, you will usually get the chance to vote on big problems that hit the real estate asset, like if a new lease needs to be signed, if there are questions related to mortgages and selling the asset.
Though TIC investments and Delaware Statutory Trusts have their particularities and differences, they frequently hold title to the same kinds of real estate. While the Delaware Statutory Trust is usually seen as a more passive investment method, there are times when TICs are enticing, like when investors want to use cash-out refinancing after owning a TIC investment for a few years in order to get back a big part of their equity that can be invested in other properties. Both DSTs and Tenants-in-Common Properties are eligible for 1031 exchange tax treatment, which lets the tax on capital profits to be avoided if the profits are reinvested in other physical investments. Both structures are utilized by direct cash investors looking to diversify from the stock marketplace.
Example: Alicia has invested $100k in a TIC structure that owns and handles a 98-unit multi-family building. Each month, the Tenants-in-Common Property sponsor shall distribute the share of Alicia’s monthly income to her in cash. The income is taxable, but it can be covered in part by deductions. When a Tenants-in-Common Property is sold, Maria may avoid taxes on any profit if she reinvests the profit in an other investment asset.
Investing in income assets diversifies the stock or bond portfolio of investments and, along with appreciation, provides the potential for income.