Real estate securities provide investors with the benefits of owning commercial real estate without expending large amounts of capital. They also generate stable returns, which has resulted in rapid growth of the real estate securities market. However, before diving into real estate investments, it is important to understand the unique features of this asset class.
What Are Real Estate Securities?
Real estate-based securities represent an indirect investment in something related to real property, i.e. hotels, office buildings, apartments, medical facilities, warehouses, etc. There are many different types of real estate-based securities. They include:
Real estate development projects
Real estate investment trusts
Mortgage investment companies
Real estate joint ventures
Land banking (purchasing and holding undeveloped property and then conveying it to the developer)
Understanding REITS
Real estate investment trusts (REITs) are by far the most common type of real estate security. A REIT owns and/or operates income-producing real estate or related assets and allows investors to buy shares. Investors can earn profits from dividends or an increase in the value of the REIT’s shares.
What is the Principle Real Estate Securities Fund?
The Principal Real Estate Securities Fund offers investors access to a diversified portfolio of publicly traded real estate securities, including real estate investment trusts (REITs) and related companies.
REITs often own many properties. Some have diverse real estate portfolios, while others focus on a particular property sector, industry, or geographic region. Many REITs are publicly traded and registered with the Securities and Exchange Commission (SEC). A minority are private funds whose shares are generally only eligible for purchase by accredited investors.
REITs are not required to pay corporate taxes on the income and capital gains they distribute.
However, to qualify as a REIT, companies must follow specific rules defined by the Internal Revenue Service. The requirements include:
Investing at least 75 percent of total assets in real estate, cash, or U.S. Treasuries
Deriving at least 75 percent of gross income from rent, interest on mortgages that finance real estate, or real estate sales
Paying a minimum of 90 percent of their taxable income to their shareholders through dividends
Operating as a taxable corporation
Being managed by a board of directors or trustees
Having a minimum of 100 shareholders, with no more than 50 percent of the shares held by five or fewer individuals
Given their minimum distribution requirement and cash-flow-oriented business structure, REITs generally generate higher dividend yields than other investments. The demand for REITs has contributed to the recent expansion of the real estate securities market.
Risks and Benefits of Investing in Real Estate Securities
Understanding the benefits and risks of real estate securities is crucial for making informed investment decisions. Real estate securities provide many of the benefits of real estate ownership while minimizing the risks. For instance, buying an investment property generally requires a large amount of capital, while investors in real estate securities can select their individual financial contribution levels. Investment properties are also notoriously illiquid. In comparison, real estate securities can generally be readily traded or sold.
Real estate investing offers one of the best returns on investment (ROI), particularly when compared to other investment strategies. Adding real estate securities to your portfolio can also be a great way to diversify. Real estate has a low correlation with other major asset classes, so if the stock market drops that doesn’t necessarily mean that your real estate investments will also suffer. While real estate investments are not inflation-proof, property values and rental rates typically increase in line with general price levels, which provides protection against inflation.
Like any investment, real estate carries risks. Most importantly, there is always a risk of not earning a return or not recovering your investment. Real estate investments are often sensitive to changes in the overall real estate market as well as fluctuations in interest rates, which can impact both property values and occupancy demand. REITs that focus on specific geographic locations or property types such as malls or inner city office buildings can be significantly affected by declines in those areas. Some REITs may also come with high management and transaction fees.
Trusted Guidance on Real Estate Securities
Scarinci Hollenbeck has significant experience handling a wide range of real estate securities matters, including structuring, forming, and investing in REITs. Our clients, which include brokerage firms, institutional and private investors, entrepreneurs, developers, and real estate owners of all types, obtain comprehensive legal counsel from members of our Tax, Commercial Real Estate, and Securities practices.
Before You Buy: Managing Real Estate and Permitting Risk for BESS Projects in New York and New Jersey
For developers pursuing battery energy storage system (BESS) projects, finding the right property is only the beginning. BESS site selection is as much a legal and transactional exercise as a real estate decision, with risk analysis central to the project’s ultimate success. Key Takeaways The core questions for BESS site selection in New York and […]
What Business Owners Get Wrong Before Meeting a Litigation Attorney
What should you expect when meeting a litigation attorney about a business dispute? You should expect to describe the dispute in your own words, hand over the most important documents, flag any deadlines or immediate threats, and leave with a clearer picture of the problem, what information is still needed, and the likely next steps. […]
Arbitration vs. Litigation vs. Mediation: What New Jersey Businesses Should Know Before Signing a Contract
Arbitration resolves disputes privately before an arbitrator whose decision is usually final, while litigation resolves them in court with full rights of appeal. Whether a business ends up in arbitration or litigation is often decided when it signs the contract, long before any dispute arises. Key Takeaways When facing a contract dispute, carefully consider your […]
Can You Own Part of a New Jersey Business Without a Written Agreement?
Can you own part of a business in New Jersey without a written agreement? Yes, it is possible. Under New Jersey’s Uniform Partnership Act, a partnership can arise when two or more people carry on a business as co-owners for profit, whether or not they ever intended to form one. Ownership doesn’t necessarily depend on […]
Crisis-Proofing Your New Jersey Business: Building a Crisis Response Plan Before You Need One
For New Jersey businesses, crisis preparedness should be viewed as a legal and operational function, not simply an emergency-management exercise. A well-designed crisis response plan can help preserve evidence, protect confidential communications, meet reporting obligations, limit unnecessary exposure, and prevent an already difficult situation from becoming a larger legal problem. Key Takeaways A serious crisis […]
Monmouth County's Next Development Wave: What Developers and Investors Need to Know
Monmouth County is entering a significant new phase of development. For those looking to acquire property or undertake a new project, understanding the market opportunity is only the beginning. The more important question is whether a particular property can actually be developed as contemplated and what approvals, agreements, and other conditions will be required to […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!
