How to Invest in Real Estate: REITs and Real Estate Crowdfunding
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How to Invest in Real Estate: REITs and Real Estate Crowdfunding


Chris Hill: Hey, thanks for watching! We’re coming to you from Fool
global headquarters in Alexandria, Virginia. I’m Chris Hill here with senior analyst
Matt Argersinger. Thanks for being here! Matt Argersinger: Thanks
for having me, Chris! Hill: We’re going to be taking your questions
in a little bit about a market three times the size of the stock market. We love talking about stocks here at
The Motley Fool, but anytime we can get a market opportunity three times bigger, we’re interested.
We’re going to be talking about real estate. Let me start with just
where we are right now. This is something you’re spending all your
time focused on, real estate investing. What is the state of real estate right now? Argersinger: Good question.
It depends on who you talk to. […] … they’re a little more neutral on the market.
They know times have been good. They know capital has been flowing. It’s been
easy to get capital, it’s been easy to do a lot of deals. They’re looking out a little further ahead and saying,
“Things are a little frothy in certain areas.” But, for the most part, in most markets,
supply and demand are in balance. There’s not too much supply of anything, there’s
not really too much demand exceeding supply or not exceeding supply.
So, pretty neutral, I guess. Just a little bit concerned
about where we go from here. Interest rates don’t seem
to be a problem as they used to be. They’re going lower. That’s a little better for maybe higher-levered
developers or real estate companies. So, overall, as boring as it might sound,
it’s a pretty neutral approach right now in the market. Hill: It is pretty interesting, when you think
about how much talk there has been over the last few months about the following two things:
the end of the bull market — because let’s face it, a 10-year bull market is
rare — and the potential for a recession. For all of the talk of those two things,
you really don’t hear a lot of concern about real estate collapsing,
certainly in the way we saw 2008, 2009. Argersinger: No. I think a lot of real estate developers,
because 2008 and 2009 was so bad, they feel like they’re more prepared for it.
Balance sheets are a little better. They’re not taking the leverage that they
did back then. I worry a little bit about that. I think there’s a little
bit complacency there. Capital has been so available, and not just
in normal courses, but private equity’s gotten into real estate in a big way. Opportunity zones have come about,
which has caused a huge gush of capital gains, differed capital, to come into
the space, chasing a lot of deals. And there’s some time pressures with that. I think there’s a little bit complacency in the sense of,
what if this capital spigot gets turned off? And that can happen
really quickly if there’s a downturn. I don’t think a lot of real estate developers
and investors are prepared for that necessarily. But, again, do they see bubbles on the rise?
Do they see a recession right around the corner? Not really. It seems like that’s
been pushed out a little farther. Hill: Let’s get into some
of the investing opportunities. I think, first and foremost, to the extent
that people think about investing in real estate beyond buying a home,
they think about real estate investment trusts. Argersinger: Right.
REITs are a big part of the market. They’ve been around
for more than 50 years. It’s a great, very liquid,
cost-effective way to get into real estate. There’s hundreds of REITs out there.
They’re traded just like stocks. You can get REITs that specialize in hotels,
REITs that specialize in apartment buildings, REITs that specialize in office buildings. You can specialize and diversify with REITs,
which is nice, and they’re highly liquid. I think that’s a great way
to do it if you’re a beginning investor. If you have a little more capital, a little
more patience, a little more risk tolerance, there’s certainly the private markets,
which we can talk about as well. Hill: Yeah, let’s get into that. That’s something you and your team have been
spending a lot of time on, this crowdfunding approach, which really has opened up real estate
investing opportunities for everyday investors. Argersinger: Chris, if you remember back to
the early 90s, right around when The Motley Fool was getting started, internet was in
its infancy, and you had the rise of discount brokers. Suddenly, buying and trading stocks became
cheap, and it’s gotten even cheaper. Now it’s actually free.
And it became much more accessible. Well, that same dynamic is actually
playing out in the real estate market. And it really was began with the passage of
the JOBS Act about eight or nine years ago, and the subsequent regulations that came out
of it, the technology that’s arisen since then. Now, really, you can get access to real estate
from across the country, institutional-quality real estate, and you don’t have to have the
hundreds of thousands of dollars that you had in the past or the connections,
the rich uncle like, as I like to say. It’s really all right there for you,
looking at your laptop and looking at deals, you can invest in an office building in Chicago,
you can invest in a hotel in California. It’s all accessible and it’s getting more
accessible by the day, and cheaper to do. Hill: What are a couple of things that you
tend to look at when you’re looking at those types of opportunities? Do you just start from an industry
standpoint and think in terms of, “Alright, I want to go out and I’m going to be looking
for residential real estate deals”? Or, is it more regional and
focused on geography? Argersinger: The old saying,
“location, location, location.” It is still a location game in real estate;
but there are categories of real estate that tend to be better on a risk-adjusted basis. For example, multifamily apartment buildings
tend to be one of the safer commercial real estate classes to invest in. There’s a lot of demand, especially you’re
looking in cities, for those kinds of assets. Office buildings in cities as well,
pretty compelling asset. Things like hotels, retail properties,
shopping malls, outlet centers, those tend to be a little farther out there on
the risk curve right now. There’s obviously secular
pressures against those. So, from a categorical standpoint, I think
looking at things like multifamily, office, industrial — which we can talk about, because
there’s a great warehouse fulfillment e-commerce angle that’s going on right there — those
are some places we’ve been focusing on because that’s where there’s a lot of strength, there’s some
natural long-term tailwinds happening there. Whereas, some of the other traditional
categories are facing greater pressures. Hill: I know you’ve got a couple of
investing ideas to share in just a minute. First, I have to ask you about what is probably the
real estate story of the year, and that’s WeWork. As someone who focuses on real estate investing,
do you look at WeWork and the rise and fall of this company that came so close to going
public at a valuation close to $50 billion — Argersinger: Remarkable. Hill: — and then basically crashing and burning,
was that a failure of the management? Or was that a failure of
the underlying business? Argersinger: I’m going to
side more on the underlying business. Even a year ago, when WeWork was just going
gangbusters, you’d have conversations with developers in a lot of markets, and they were
kind of excited but nervous at the same time seeing WeWork become a big part of
the tenant base in a lot of these cities. That was because you’ve got a business model
that’s relying on short-term subscriptions, short-term revenue,
married against long-term liabilities. That’s been tried before, actually, in real
estate, and it’s never really worked. I always thought at some point, if there was
a downturn in the market, the entrepreneurial aspect of it, the flex office space
aspect of it, would quickly be shut off. So, if you’re a landlord, you have this great
WeWork tenant base, but all of a sudden, it’s cyclical, it goes away, and you’ve still got
a big liability on your hands with a lease that’s not being paid. So I always assumed
that at some point, it was going to collapse. I didn’t think the corporate governance was
as bad as it is. I don’t think anyone did. When that all came out, it was like,
“Wow, OK, this is a big problem here.” But I always thought, at some point,
they were going to have some serious trouble. You could almost see those cracks forming pretty early
if you were in the private real estate markets. Hill: Another story in the real estate world
that’s gotten a lot of attention is, it seems like every month, there’s yet another major
bricks and mortar retailer coming out and announcing either, “We’re closing hundreds
of locations,” or, “We’re on the verge of bankruptcy,” some version of that. Do you feel like that’s overblown, only from
the standpoint of, you actually have a lot of other businesses that are
coming in and filling that space? Argersinger: I’m less worried about that. I do think we still have too much retail square
footage in a lot of places around the country. There are probably still a lot of bad shopping
malls, bad outlet centers, big box retailers. At one point, there was probably enough demand
to support the location; today, there’s not. But, that doesn’t mean all
retail is the same, as you said. We recently invested in
a restaurant space here in D.C., Nobu. If you don’t know Nobu, famous Japanese restaurant,
one of the most famous restaurant concepts in the world, actually. Robert De Niro
is a part owner of the franchise. This happens to be in Washington D.C.’s West End
neighborhood, which is one of the wealthiest neighborhoods in D.C.,
if not the whole country. That’s an example of what
we call high street retail. That means, I’m talking about places like Starbucks,
or nice, high-end restaurant concepts downtown, design shops downtown.
There’s a lot of potential there. A lot of big companies are looking, actually,
for spaces just like that as their brick and mortar solution to customers. But then also, what you said, there’s going
to be a whole redistribution of a lot of property that’s out there. I read the other day that one of Simon Property Group’s
old malls is being converted into an e-sports arena. That’s anecdotal, but that is happening. A lot of these former retail spaces are being
turned into either game places, service places. They’re just being re-engineered
to serve a different purpose nowadays. That’s going to happen. So, retail square footage in
good locations, it’s going to do just fine. There’s a lot of optionality around it.
Hill: Nobu, obviously, a great restaurant concept. What else are you and
your team looking at lately? Argersinger: I mentioned
opportunity zones earlier. That’s one place that’s
getting a lot of excitement. Yesterday, I was touring an office building
here in Northern Virginia that’s being converted into a multifamily
apartment building, luxury apartments. It’s 10 minutes away from Amazon HQ. We know everything that’s going to be
happening there over the next several years. It’s also walking distance to this place called
the Mark Center, which is a place that employs 6,000 government employees. Here in Northern Virginia, the D.C. area in
general, the economy is good, there’s lots of jobs being created,
and there’s a lot of need for new apartments. Actually, we have a little bit of a demand/ supply
imbalance here when it comes to apartment buildings. So, converting this office building into an
apartment building, lots of good stuff happening there. But it’s also, like I said,
in an opportunity zone. So, if you’re an investor, you can take capital
gains, you can realize capital gains in other assets like stocks, you can roll them into
this opportunity zone investment, which is supposed to target 14% annual returns
over the next 10 years, defer your capital gains, and any gains from the
opportunity zone are earned tax-free. That’s an incredible benefit
if you’re a real estate investor. It’s something we’ve taken advantage of a
little bit this year. This is going to be our latest one. Again, you have to be very selective.
There are a lot of opportunities zone deals out there. A lot of them aren’t that because opportunity
zones in general are places where the economy is struggling a little bit over
the years. You have to be very selective. But, you can find opportunities like
the one we looked at yesterday. Absolute home run, it looks like,
so we want to be in on that. Hill: Alright, if you’re looking for more
details, you can go to realestate.fool.com. We’ll e-mail you our free guide to investing
in real estate and more details on some of the types of things
Matty’s been talking about. Before we get to questions from the audience
— and keep the questions coming, a lot of great questions coming in — a couple of investing
ideas for anyone out there watching right now who’s looking to at least put some
real-estate-related investment opportunities on their watch list?
Argersinger: Sure. I’ve got two REITs. Matt Frankel and I, who works with me
on our Mogul real estate service here, these are two of his favorites as well.
One trend that’s really out there is student housing. If you think about major universities, like, say,
Florida State University, or Cal Berkeley, or the University of Texas at Austin,
campuses with tens of thousands of students, they’re looking for ways to
outsource their room and board. So, outsourcing student housing to private
landlords has been a pretty big trend lately. The leader in that space right now
is American Campus Communities. Ticker is ACC. They’re a pioneer in this
private student housing space. They’ve been around for about 15 years. They own almost 200 properties,
work with dozens of universities, big universities. It’s a big trend and I think it’s only going
to get bigger as universities find ways to lower costs when it comes to housing. And, of course, students are looking for
different ways to live and do things on campus. In the private market, there’s a lot of opportunity
to do some interesting things with that space. So, that’s one trend. Another big trend, and I think I’ve talked
about this one before, warehouse and fulfillment. Huge trend in commercial real estate. This industrial real estate category, especially
with single-tenant properties in and around big cities that have convenient
access to highways, transportation lines. STAG Industrial is one of the leaders in this space.
Almost 400 properties around the country. The vast majority of those are quote
“warehouse distribution centers,” so, imagine tenants like FedEx, XPO Logistics, using these facilities
to just manage this huge e-commerce flow that’s going out to all these major cities. You can
imagine that’s a trend that’s not going to change. It’s not as if consumers are suddenly going
to say, “I don’t want two-day free shipping or one-day free shipping. I’m good with
how it used to be, getting stuff in a week.” No. It’s only going to get faster,
and it has to be more cost-efficient. Companies like STAG Industrial
can really take advantage of that trend. Hill: Alright. If you’re enjoying the video,
please consider giving us a thumbs up. It helps other people find the video.
Again, go to realestate.fool.com. We’ll e-mail you our free investing
guide when it comes to real estate. Let’s get to the
questions that are coming in. David asks, “Can real estate be considered a good
protection against inflation, similar to gold?” We certainly hear that all the time about
gold; it’s a great hedge against inflation. You think real estate is the same way?
Argersinger: I think it is. And I think real estate, biased here,
is a much superior asset class to gold. We won’t get into that. But yeah, real estate, if you think about it,
the cost of materials that go into building a home, a building, the labor that goes into that,
that’s always going to go up over time. It hasn’t gotten cheaper to build houses or
buildings, it’s generally just risen with inflation. Right there at the minimum, I think you have
properties that should appreciate along with inflation. Of course, if you then focus your capital
on areas where there’s tighter supply, or there’s greater demand over the long term,
you could see appreciation much beyond inflation. The nice thing is, real estate, unlike a lot
of securities, a lot of assets, lets you use leverage pretty effectively. Even if your property is only appreciating
2% or 3% roughly, along the lines of inflation, if you’ve got 4:1 or 5:1 leverage on that,
all of a sudden, it’s a double-digit return, and yet it’s a pretty safe asset that’s really
only increasing a little bit every year on a gross level. That’s a long-winded
answer to the question. I definitely think
it’s a great hedge against inflation. Hill: A couple of people asking, how should
you think about allocating your net worth between real estate and stocks? Great question, because a lot of times,
we look at stocks in terms of risk, in terms of spreading out the risk
over industries, or growth vs. value. Is there a general rule of thumb when it comes
to balancing real estate and stocks? Argersinger: No general rule of thumb. It really
depends on who you are and what you want to do. In my personal investing,
stocks and real estate are about roughly 50/50. I have some rental properties.
I have some commercial investments. I own a lot of REITs. What I like about real estate especially is,
historically it’s returned similarly to stocks. In certain periods, even greater. If you look since the year 2000, real estate
as an asset class has outperformed the stock market by almost two to one.
But over history, roughly in line with stocks. The big thing, though, is that real estate
is less than half as volatile stocks. If you look at the standard deviation of returns of
various indexes, real estate is less than half as volatile. We’re not too concerned with volatility here
at The Motley Fool, and you shouldn’t be as an investor. But geometrically, if you’re growing your
wealth over time, it’s better to have less volatility. I think real estate can really
introduce that in your portfolio. It’s not like you’re sacrificing
returns by going to real estate. You’re bringing in great returns,
but also less volatility. That’s usually helpful to a portfolio. Hill: Similar to investing in stocks,
the longer your time horizon, the less volatility matters, and the
better off you’re going to be. Argersinger: Absolutely, same thing. Hill: David — I’m assuming a different David
— asking, “What do you think about investing in Macy’s as a play on its real estate value?”
Argersinger: It’s a good question, David. It’s something my team
and I have looked at. Macy’s does have some incredibly valuable
real estate, including its headquarters in Manhattan, which is a wonderful,
beautiful building that could be worth billions, depending how you value it. My problem with Macy’s is, I don’t know how
fast or far they’re going to shift to that kind of asset monetization.
The natural comparison is Sears. Sears had roughly the same strategy
10 years ago, and they sort of did that. They got rid of a lot of their good real estate. But they kept a lot of the real estate,
and then kept a lot of the stores open, and tried to keep them going. I worry that the trend against Macy’s is just
a little too strong, still, to say that the asset value of the real estate is
enough to make it an out-performing investment. It might get there soon,
but right now, I’m not sure I trust it. Hill: You think back maybe 10, 15 years ago,
Macy’s stock was a good performer in part because they were
so judicious in their footprint. They were one of those retailers that really
didn’t over-expand and did a good job of monetizing sales per square foot, in a way that some
of the so-called big box retailers really weren’t doing as good a job of.
Argersinger: That’s right. So, I would say, if there is a company that
does shift that way and says, “We’re really going to do things to monetize the incredible
asset value we have in our real estate,” Macy’s is probably going to
have more success than other companies. Hill: Question from Gary, who asks, “How can
I invest in private markets or in crowdfunding?” Great question!
Argersinger: That is a great question! You can go to realestate.fool.com, give us
your e-mail, and we will tell you about how to do it really directly. But, these days, if you’re an accredited investor
— which is part of it — it’s actually fairly simple. There are a lot of
crowdfunding platforms out there. We work with several here in Mogul. You just have to be careful because, with
these platforms, a lot of them don’t have long-term track records. Like I said, this whole industry has only
been around for less than a decade. We try to do a good job
of rating these platforms. If you go to millionacres.com, for example,
we have a tab on crowdfunding, and it has a report there on some of the
big platforms that are out there. You can check that out. But, if you’re an accredited investor,
there are deals out there on these platforms. Just be careful to make sure you’re getting
the right information, and really look into the track record of these platforms, make sure
that they’ve done a good job underwriting a lot of these deals for
their users. But, fairly easy. Like I said, average investor can go on their
laptop, open an account with one of these platforms and get going. Hill: I think the comparison you drew to investing
in stocks in the early 90s is a really apt comparison. If you’re a younger person, you probably have
no idea, or very little idea, that once upon a time, it was incredibly
expensive to trade stocks. You would be charged hundreds
of dollars just for a single trade. You had to call someone on the phone to do it.
The early 90s is when that started to open up. It really seems like that’s
happening with real estate. Argersinger: Yeah,
and it’s exciting, Chris. I remember, in the early 90s,
reading some of Peter Lynch’s books. What Peter Lynch said was,
you can invest in what you know. That, in my mind, at that time,
was groundbreaking. I was very young, so I wasn’t
even buying stocks at the time. But the idea that you could shop at a store,
go to a Starbucks, go to a Gap at the time, and say, “I can actually own a piece of this
company through the stock,” well, nowadays, the way the real estate market
has evolved, you can now do that. You can walk down a city street, look up at
a building, and say, “Gee, I wonder if it’s possible to buy a piece of this building.”
More times than none these days, it actually is. It’s pretty exciting. Hill: Jim asks, “What are your
thoughts on agriculture REITs?” Argersinger: I’ve personally not paid a lot
of attention to agricultural REITs. I think there’s a lot of valuable land out there,
especially land that has a lot of different uses to it. But, it’s an area of the REIT market that
I haven’t spent a lot of time looking at, so don’t have
a good answer. Sorry! Hill: Greg asks, “Is there any way to get
into REITs through a 401(k) plan?” Argersinger: Yeah, absolutely, Greg.
Hopefully, your 401(k) at your company allows you to. At The Motley Fool For example, we have a
401(k) that, I don’t know if it actually specifically has any real estate funds attached to it,
but it lets you do a self-directed brokerage account at a Charles Schwab,
TD Ameritrade, or name your broker. Through that, of course, you can set up your
own 401(k), self-managed, and buy REITs. It’s good that Greg brought that up, because
I think an IRA or 401(k) tax-deferred account is a great place to own REITs given how
they’re paying dividends and distributions all the time, and you’d love to keep those tax-free. Hill: Bill asks, “I live in the New York City
area, where the real estate market is dropping. How do REITs protect
you from a real estate drop?” Argersinger: Bill,
New York City’s interesting right now. There’s a lot of problems on the luxury
side of the residential market in the city. Costs are also pushing a lot of offices and
companies that used to always want to be in Manhattan elsewhere,
and you’d expect that. REITs will generally hold up better in overall real estate
downturns just because they’re so diversified. Your average REIT might have, let’s say, 100
properties spread across 16, 20 different states. So even if the New York market is
sinking — I don’t think it is — it’s likely that whatever REIT you’re invested in, whether
it’s an office REIT, apartment REIT, it’s going to have buildings, maybe, in D.C., in Chicago,
in Dallas, Texas, which is a very strong market. So, generally, you’re going to be balanced
enough where one particular problem in one market’s not going to
really acutely affect you. Hill: Question from Louise, who asks, “I love
the idea of getting some sweet high-yield REITs, but I’ve heard the tax situation
with their payouts is a little tricky. Is that something the
average person can figure out?” Argersinger: Oh, definitely.
It’s easy to figure out. But, yes. REITs pay high dividends, which we love. That’s because they’re required to pay out
90% of their pre-tax income as dividends. The problem is, those are generally taxed
at your ordinary income tax rate, so you’re not paying the qualified dividend tax rate
of 15% to 20% that we’re used to with other companies; you’re paying your ordinary
income tax rate on them. But that’s OK, because
you’re getting a higher yield. Of course, if you have those in tax-sheltered
accounts like IRAs or 401(k)s, that’s a great way to handle it. My only caution, Louise, would be, if you
see REITs with particularly high yields — let’s say a yield
that’s above 6% or 7% — I’d start to question whether or
not that’s a sustainable dividend yield. A lot of companies, especially mortgage REITs,
tend to pay those high dividends, and they come with a lot of added risks that you want
to account for, even though you’re excited about the dividend.
Hill: Warren asks, “What is an accredited investor?” Good nuts and bolts question.
Argersinger: Yeah, good question, Warren! The definition of an accredited investor is
an individual investor who has $200,000 in gross annual income or $300,000 with a spouse,
or, that person can also have $1 million in net worth, excluding their
primary house or residence. Believe it or not, those requirements have
been in place for several decades now, so more and more investors
these days should be accredited. Check that on yourself, and maybe you’re in a situation
where you are accredited, or you might be close. But generally, even though it’s getting wider
and more expansive, most private real estate deals today still require you
to be accredited to actually invest. That goes for all the crowdfunding
platforms out there, as well. Hill: Peggy asks, “What is the
easiest way to find invest in a REIT?” Argersinger: If I can, I’ll say go to millionacres.com.
We’ve got a great REIT section there. Matt Frankel, who works with me in Mogul,
but we also have a number of wonderful writers who are writing about their favorite REIT
ideas every day, talking about them, track covering their earnings and things like that,
and explaining the best way to invest in them. So, millionacres.com,
and the REIT section on the website. Hill: To go back to what we were talking
about before, I think certainly for people, I’ll put myself in that category, who maybe have
been investing in stocks for a decade or more, the real estate market takes
a little bit of getting used to. It’s absolutely worth the time to read up
a little bit, even just to familiarize yourself with some of the terms.
The basic act of investing is the same. We’re still looking for the same returns.
And our mindset is still the same. Like we were talking about earlier,
we still have that long-term mindset. But, yeah, it’s a slightly different pond to swim in.
Argersinger: It’s slightly differently. We’re still looking for good managers,
good CEOs, CEOs with great track records, who are invested, have personal stakes in the REITs.
It’s as if we’re looking at a normal company. But you do want to play a little more value on,
of course, the real estate assets that the property owns, because that’s the key driver
of the business, the key competitive advantage. Getting a basic understanding of what properties
they own and where is going to go a long way to helping you understand
what’s really behind the REIT. Hill: You just inadvertently
teed up our next question. A couple of people asking,
what is the most stable type of REIT? Housing, retail or commercial? Argersinger: The most stable REIT —
to me, everything falls under commercial. Even though we talked about housing,
multifamily, and things like that, in my brain, that’s still a commercial
type of property. But, yeah, I would say the
most stable is probably multifamily. We’re talking about apartment buildings, either
in cities or outside of cities, garden-style apartments, even quadplexes.
We can get down as small as that. That tends to be the
most stable over time. If you look at the office market,
even though it’s not completely cyclical, it’s still very economically sensitive. Hotels, and retail,
of course, very economically sensitive. Industrial is interesting, but you also have,
in a lot of cases, a single tenant per building in industrial. If that tenant gets into trouble,
so does your property. So, I would say multifamily gives you good
diversification, good long-term tailwinds, especially in this world today, where a lot
of people are renting rather than owning. That’s a more recent phenomenon. We’ve seen that more and more, and people
taking a lot longer before they buy their first home. Rental apartment buildings, especially, again,
where people want to be living, is a great trend. Hill: Amy asks, “When you’re looking
at deals, do you start with hot markets? Or are you thinking more about
how the property is being used?” Argersinger: That’s a wonderful question. I find myself starting with one or the other
depending on what kind of property I’m looking at. I think you can start with the
hot markets, you can start with location. Location, location, location. For example, I know I’m going to do a lot
better today if I am starting my housing or commercial real estate search in a place like
Charlotte, North Carolina, or Austin, Texas, or Nashville, Tennessee, than I am if
I’m starting in New York City, for example, or Chicago, or Detroit, some of the
Rust Belt markets that have really struggled. You’re putting yourself at
a disadvantage starting in places like that. You give yourself a nice leg up by going to
a place like Austin, Texas, which has seen extraordinary growth, or even
a place like Jacksonville, Florida. A lot of people think of Jacksonville and…
but, the population there has grown 15% of the last 10 years.
It’s a booming city, actually. You can start there, and you’re going to give
yourself some really good advantages. But beyond that, again, focus on those categories
that are going to have long-term sustainable demand drivers. Like I said, apartment buildings in those
places, office buildings in those places. Just watch out for retail and
hotels because those can be very cyclical. They’ve got some
long-term pressures. Hill: Sid asks, “How badly can REITs be
affected by a stock market crash?” Argersinger: That’s a good question, Sid. In stock market crash,
as we know, everything falls. There’s nothing that’s going
to be protected in that scenario. But REITs generally hold up better over time
because there’s a real, tangible value to their asset base. Especially today with REITs, REITs are in
my view among the cheapest of sectors within the stock market just based on their balance
sheets, based on historical valuation. If I had to be a prognosticator, and if you
expected there would be a sharp stock market, not a crash, maybe a fall in 2020 or somewhere
later, I do expect REITs would hold up better, as they have historically. Hill: We’ve got a free guide
to investing in real estate. 50 pages, a lot of great content that
Matt and his team have put together. Go to realestate.fool.com,
you can get that report. Matt Argersinger, thanks for being here!
Argersinger: Thanks, Chris! Hill: Thank you so much for watching!
Thanks for giving us a thumbs up! Don’t forget to click the subscribe button
so you don’t miss any of the YouTube Lives that we do. I’m Chris Hill.
Thanks again for watching! We’ll see you next time!

10 thoughts on “How to Invest in Real Estate: REITs and Real Estate Crowdfunding

  1. I personally believe in 10, 20 years and beyond, good companies generate more total returns than any other asset class….
    But if one feels more familiar with real estate, then it's always the best investment channel for her or him….

  2. When evaluating REITS, it is obviously critical to find out what the "payout ratio" for the dividend is. The problem with this is so many financial sites show this ratio using earnings in the calculation as if it was a typical equity. REITS are different as the payout ratio needs to be calculated using "Funds from operations" (FFO) or "Adjusted Funds from operations". Consequently, those sites that don't calculate "payout ratio" properly for a REIT will invariably show this ratio greater than 100%, which of course is inaccurate giving the wrong impression the dividend is not well covered. So check this in your due diligence. (REITS are about rents, leases, depreciation/amortization etc. , not earnings as a traditional metric).

  3. interesting video, I learnt about a new REIT in the student market sector. Nice one. Just added to my watchlist…..PS I have been a happy Fool.com newsletter subscriber and made lots of $$ (ok we have been in a 10 year up stock market but still….I did beat the S&P500 thanks to Fool.com recommendations…..even though they will give you so many recommendations so you will have to do some more digging…..and I did that myself mostly on how scalable the business model is and how defendable the competitive advantage a company has…..so…..fool.com is a fantastic start …..but…… the YOU are responsible to choose the right company amongst the many many they will bring to you…ok I have lots of practical business experience and an MBA which of course helps). Keep going Fool.com

  4. I am impressed that the Fool is now covering real estate, and particularly REIT's. This is an asset class that is often ignored by retail investors, because the companies tend to be small-cap/mid-cap, and do not have name-recognition. They are also a tax structure and business model that defies typical investing ratios and rules of thumb. Their p/e ratios are irrelevant for instance. Their payout ratios (as stated below), are usually using the standard gaap eps figure (also irrelevant).

    This is a sector that really does warrant fundamental statistical research to make good buy decisions. You can't just buy a REIT because of a trend and expect it to do well. REIT's rarely trade on momentum, and rather are mostly priced based on cash flows. Understanding cash flows and credit risk (ability to pay the dividend), are the most important factors in evaluation.

    The analyst in the video recommended STAG and ACC. If you look at STAG (single tenant acquisition group), you cannot simply look at the e-commerce and warehouse market and make a bet. This is not a "growth stock" that will grow into a high valuation. If you look at the AFFO per share metric you will get an idea of what this REIT is trading at. Over the last 8 years since its IPO, it has averaged a 15 p/affo (the reit p/e ratio), and has grown about 5.8% per year (excluding the first year of hyper growth). Today the company trades for 17.4 p/affo. So it is trading above its 8-year average. Analysts are expecting similar growth going forward. So an intelligent investor will look at this and say that they should wait for the valuation to revert to 15 p/affo prior to buying. Then they can rely on the internal returns of the business to make money off the investment. STAG pays out a 4.7% dividend yield, and grows their affo by 5% per year. So you should expect about 9-10% by combining those two internal return metrics, and buying at a 15 p/affo. If you buy today at 17.4, you have to factor in a reversion to 15, which is 12% lower than today's price. Over 5 years, that knocks 2% per annum off the implied return, leaving you with only 7-8% annual returns. That doesn't suck, but it's not the true return the company is producing. You are hampered by the higher price.

    Looking at ACC you will see a company trading at fair value today based on the same analysis as I made for STAG. Average p/affo for the past 10 years is 21x. This has traded at a premium since inception. It has a BBB rating, which is something STAG does not have (it is not rated). Being in the higher ed market is much less volatile than warehouse space, which likely is the reason behind the higher valuation. Its growth rate is moderate at 4.6% over ten years. It pays a 4% dividend. So using the same analysis, we add those two and keep value the same, and arrive at a 8-9% return implied.

    Neither of these returns are great, but they are rather safe investments that should do better in poor market conditions like a recession. STAG is a triple net lease reit, and therefore has longer term leases and very low overhead. Triple net lease reits are known for their stability and annuity-like dividends. STAG is a great business, but I may wait for a little lower price to buy. ACC looks to me to be fairly priced but I am not crazy about the growth rate for paying that high of a price as has historically been paid for the stock. There have been about 5 years out of the past 10 that ACC has traded well below 20x p/affo, and so that shows good odds that if you are patient you'll get a better price still.

  5. I signed up for millionacres about 3 months ago but all I keep getting is spam mail about "Reports I shouldn't miss." I thought it was space I could get in on investing with Mogul.

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