Ways for families to invest in real estate and minimize the hassle
Brian Thomas and his wife decided not too long ago that a modest investment program to cover future family education costs was in order. And so their thoughts quickly turned to real estate, an investment vehicle that would give them a needed tax shelter as well as substantial capital-gains potential.
Brian makes a good salary as a computer programmer, but much of that goes for immediate family needs each month. It became clear that if there were to be money available down the road for their children's college education, a specific effort to generate those funds should be made now.
The only problem with real estate was that the Thomases, like many other Americans interested in real estate investment, don't like the prospect to tenant hassles and other property-management problems.
They settled on financial interests in real estate syndications as well as real estate investment trusts (REITs). Both of these plans are management-free.
Such investment plans earned a bad name in the late '70s, when high interest rates meant that investors often did not recover even their original investments.
Now, however, increasing demand for real estate investment has sparked a dramatic growth in these two areas -- and a drop in interest rates has increased their yield considerably. Real estate syndications are expected to generate $4 billion by the end of this year, an all-time record. That's about three times the amount of investment funds raised in 1982.
A real estate syndication is created by pooling the funds of a number of investors to acquire property and benefit from its ownership. Typically, investors are "limited partners," while the property is managed by a "general partner."
Investors may choose from private syndications or the larger public offerings. There are more than 90 public syndications, up from 77 during the same period last year, according to Strategic Real Estate, an industry newsletter.
"The increase in syndications gives evidence that public limited partnerships are a dynamic source of capital formation for real estate," the newsletter says. "Substantial increases in funds raised by syndication sponsors indicate there are many new participants in the market as well as savvy investors who continue to be involved."
Another increasingly popular no-management form of investment is the REIT, an investment vehicle not taxed at the corporate level on distributed earnings.
To qualify as a REIT, the trust must distribute at least 95 percent of its net income to shareholders each year. It must also invest at least 75 percent of local assets in real estate and derive at least 75 percent of total income from real estate-related investments.
The increasing interest in REITs has already generated moore than $500 million in investment funds this year and could top $1 billion by the end of the year. The rapid growth of these funds results largely from the increasing number of investment companies switching to REIT status.
"I see this as evidence that REITs have entered a new era, recording strong new interest on the part of investors," says David Donosky, president of the National Association of Real Estate Investment Trusts. Total REIT industry dividend distributions during the first nine months of 1983 were up 33.6 percent from the same period last year.
Like the Thomas family, many investors today are seeking an opportunity to capture the benefits of real-property ownership without encountering management frustration. Recent activity in the market points to syndications and REITs as one increasingly popular answer.