REITs or S&P 500: What's the better investment?

Good morning! And welcome back CRE Junkies, as we share commercial real estate stories, news, and investing insights.

Here’s what we have for you this week:

• REITs or S&P 500: What's the better investment?

• Wait to Buy Real Estate? or Buy Real Estate and Wait?

⬇️ Let’s get into it ⬇️

REITs or S&P 500: What's the better investment?

We all want to invest our money as efficiently and passively as possible, right?

And while investing in S&P 500 index funds like $VOO seem to be a strong option, Real Estate Investment Trusts (REITs) are also a competitive player.

For those not up to speed on what a REIT is, it’s basically a fund that invests into commercial assets. Here’s a great article on it.

What’s the difference:

REITs buy cash-flowing commercial assets such as apartments, strip malls, office, and much more.

While the S&P 500 is owning shares in the top 500 U.S. companies.

So we have a choice: own fractional shares of businesses… or commercial properties.

But what’s the best option for an investor?

Well let’s see how the top 3 Self Storage REITs stack against Mr. S&P 500

• Extra Space Storage

• Public Storage

• CubeSmart

The graphic shows 2 of the 3 REITs actually beat the S&P.

In fact, $10k invested in 2014 would be worth $31.9K with Extra Space and only $23.8k invested in S&P 500.

Storage REITs are just one example. There’s REITS for general commercial, multifamily, hospitals, retail, and much more.

And what about dividends?

One reason investors enjoy REITs is because they pay dividends. These pay out whether the share price is going up or down, helping volatility.

In fact this REIT, Redwood Trust, has a 9.86% yield.

The S&P 500 on the other hand, only benefits from appreciation, but has maintained an average growth of 14.61% over the last 5 years.

So what are you buying? S&P 500 or REITs?

One things for sure, that it is better to be invested in something than nothing at all.

⬇️ Next up ⬇️

Wait to Buy Real Estate? or Buy Real Estate and Wait?

A lot of investors (especially new ones) are trying to time the market.

Right now - Things are a bit weird in real estate.

Interest rates are still very high, Commercial Transactions have slowed 75% from where they were at 2 years ago.

Yet, right now stock markets are near all time highs.

So this begs the question - Is now a good time to get into Real Estate Investing?

The answer is… it depends.

Let’s rewind. When interest rates were low a couple years ago, the market was on fire. Sellers were getting ridiculous offers because debt was so cheap!

Anyone that was thinking of selling knew we were at the top and sold for a fortune.

But what about now? Well - it’s a different story.

Property owners saw all their friends selling at peak prices and getting filthy rich. Now those same properties are worth significantly less (due to high interest)

So no one wants to sell at a steep discount from what their properties were worth just 2 years ago. And no one wants to buy because it won’t cash flow!

So what options do investors have right now?

Here’s two for them:

1. Get creative with deal structures to the sellers can get a decent price but the property still cash flows for investors. The simplest way to do this is with Seller Financing.

   If Sellers agree to finance the properties themselves at a lower interest rate, this relieves buyers of high debt costs and deals can cash flow again.

2. Wait it out. Yup - it’ll take some time for Sellers to adjust to this new rate environment. But some may not have the time to wait and be forced to sell at a discount.

   Forced to sell? Let’s talk about what I mean by that, next.

The reason is maturing Commercial Loans. $2 Trillion worth of commercial loans are expected to mature between now and 2026.

The problem?

Investors purchased these properties with variable rates that were low, but are now forced to refinance. And rates are now much higher.

So if they refinance, a lot of these investors will not be able to cover the higher debt costs.

Uh oh… so what are they going to do?

There’s really 2 options:

1. Refinance the debt and have to pay out of pocket until rates come down so they can refinance again. Ouch!

2. Sell the property at a discount, possible losing their initial investment or more. Mega Ouch!

The opportunity. This is what the smart investors have been patiently waiting for.

Once these loans mature, there is expected to be distressed assets for investors to gobble up.

Regardless of when you buy, now or later, every deal should be carefully underwritten and you should factor in all micro and macro market effects.

Good luck, investors!