What is Securitized Real Estate?
Securitized real estate is a real estate interest that is packaged and sold as a security. It is regulated by Federal and state securities law and requires more disclosure than most real estate offerings.
Real estate has the well-known advantage of depreciation and it also usually provides income as well as the potential for appreciation. When real estate is offered in the form of securities, investors must be given a professionally prepared private placement memorandum (PPM) as well as other offering documents. These offering documents must reflect due diligence appropriate to a securities offering. Typically, these are larger, institutional grade investments, managed by experienced sponsors.
What due diligence is performed?
Due diligence, or the analysis of the facts and circumstances associated with an investment, provides investors full disclosure of the facts and risks before they arrive at an investment decision. Initial due diligence will be performed by the sponsor, the lender, legal counsel, and then by a broker/dealer or other securities licensee.
Due diligence includes: 1) examination of the sponsor); 2) analysis of the properties; 3) analysis of the market; and 4) review of the structure of the project. If a 1031 transaction is contemplated, there will also be analysis of 1031 tax compliance
Reasons for rejection of a real estate offering by securities professionals vary; the property, the sponsor, the financing, or the market--each may be judged problematic.
Advantages of Securitized Real Estate
Access to institutional grade investment properties
Securitized real estate offers accredited investors the opportunity to join with other accredited investors to own investment-grade real estate. Normally, these properties are financially secure, with creditworthy tenants under long-term triple net (NNN) leases, and under professional management. Asset classes include multifamily housing, NNN retail properties, office buildings, industrial complexes and warehouses, and hotels
Management free
Real estate professionals structure the property acquisition, maintain and lease the property, collect rent, service the mortgage, and eventually sell the property.
Combined with the 1031 exchange process, such a portfolio can grow tax-deferred over a number of years.
Income and appreciation
Investment-grade properties typically offer stable cash flow from rental income, paid monthly or quarterly. As the debt is serviced, the investor’s equity in the property increases even if the value of the property does not. Also there is the potential for appreciation.
Tax-Sheltered Cash Flow
Some of the cash flow from these investments can be tax-sheltered and/or tax deferred by depreciation pass-through and interest deductions.
If an investor has held a property where the depreciation deductions have run out, or will do so soon, a 1031 exchange gives the investor an opportunity to restore these deductions in a replacement property if the DST or TIC has more debt than the debt on the investor’s property. The additional debt offers a new tax basis to the investor—resulting in greater depreciation expense to shelter rental income from Federal and state taxes.
Many DST/TIC properties are leveraged with up to 75% non-recourse debt financing.
Diversification
With minimum investment requirements as low as $100,000 for a 1031 exchange, investors hedge risk by diversifying their real estate portfolio to include multiple properties in different geographic locations, as well as in different asset classes such as residential apartment complexes, retail shopping centers, office buildings, and industrial parks.
What are the risks of securitized real estate?
All investment real estate can have substantial risks, such as no guaranteed income, lack of liquidity, possible conflicts of interest with managers and affiliated persons or entities, risks associated with leverage, declining markets, and challenging economic conditions. The ultimate risk of investing in real estate is the total loss of the investment.