Recession-proof Investing: Third entry in our series!
Last week we measured investing in Equity and Help against Dividend Stocks and saw how by comparison our model is not only recession-proof, but offers an additional guarantee for each of our Philanthroinvestors (PI) properties. We came to the conclusion that there is no similar protection in the stock market or in shares that pay dividends.
Since we know that there are more options in the market and that any responsible investor evaluates more than one, today we will talk about another common investment: REIT (Real Estate Investment Trust). We will detail how our model is much more attractive, not only in a normal scenario, but also where there is a recession.
“A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate.
Most REITs have a simple business model: The REIT leases the space and collects rent from the properties, then distributes that income as dividends to shareholders. Mortgage REITs do not own real estate, they finance it. These REITs earn interest income on their investments.
To qualify as a REIT, a company must comply with certain provisions of the Internal Revenue Code (IRC). These requirements include owning primarily long-term income-producing real estate and distributing the income to shareholders.”
James Chen – Investopedia.com
The most common reason someone would invest in this model is that the income comes from real estate, which is considered one of the safest investments. It’s being run by a company, so there are none of the headaches of dealing with day-to-day operations. Also it is a very liquid investment since you can sell your shares should you need your money quickly.
It is very similar to dividends in terms of frequency and return percentages on the investment, with the advantage that 90% of the taxable income is in the form of shareholder dividends. This means that by law, the investors must be paid. So there can be no arbitrary blocking of payments, unlike the dividend payment model we discussed last week.
However, compared to other types of investments, a REIT can fall victim to risks specifically associated with ownership. That is, if someone invests in a REIT with a chain of movie rental stores, their investment could suffer if shopping malls or home theater rentals go out of style. (Yes, some of us still miss the Blockbuster era.)
It means that if investments fall prey to trends, REITs can be affected by other specific factors like location, property type, and so on. This is much more difficult for investors to notice because they are not involved in the property selection process.
Before investing in a REIT, it is necessary to research and consider a range of factors in the real estate market such as interest rates, changes in tax laws, debt, property values, and geography. Other REITs may charge even higher transaction and management fees, resulting in low shareholder payouts. These fees are hidden in the fine print, which requires you to spend much more time carefully sifting through the fine print to learn more about whether this model suits you or not.
Another important factor is that the moment one of these properties stops generating income and goes into default, only the board of directors inside the REIT will make the decisions on the measures to be taken. Again, this leaves investors out of the decision-making process, as we saw earlier in the dividend market.
In short, it is a volatile market that, while liquid and can diversify an investor’s portfolio, requires a lot of research and knowledge of the market and market trends to understand the factors that can affect the prices of a REIT in a short period of time. It may not be the best option In a recession scenario where many elements can work against it.
In comparison, the Equity & Help model shares many similarities in the pros of the REIT, but doesn’t depend on speculative factors by using a much simpler premise.
Since each house was purchased at its lowest price by Equity & Help with our own funds, we assumed that risk first, before the PI. There are very few factors in the real estate market that can affect the percentage return once the property begins to produce returns. And since these are houses in rural areas that need sprucing up and repairs (which our families are trained and willing to do), there is no trend that can make this model “go out of style.”
Second, as each of our PIs own their properties and we are their trustees, we report every action and every payment made by the families on a monthly basis. In the event of a delay, payment agreement or eviction, we consult and advise you at every step.
Finally, not only in our promotional material, but also in presentations and conversations, we are absolutely upfront, promising net returns between 8 and 12%, along with a series of realistic scenarios that help our Philanthroinvestors understand the reality of our program. This eliminates the need to use small print, to set traps or to use technicalities anywhere along the line to be able to bill the investor for more fees.
All this while generating cash flow, that scarce resource in times of recession, with the optional benefit of buying guarantees that protect your investment.
In our next installment we will compare ourselves to the traditional real estate model.
See you next week!