Commercial Real Estate: A Real Alternative to Fixed Income
Updated: Nov 11, 2021
With many investors seeking income alternatives to diversify their portfolios – it may be time to consider commercial real estate.
Written by: William Levy Santa Barbara, IGRE Investment Grade RE Income Fund, LP
While individual bonds and fixed income mutual funds have historically provided diversification advantages and periodic income at regular and reliable intervals to individual investors, recent lower yields (or lower income) and the persistent threat of rising rates (in general, bond prices decline when interest rates rise), has led many investors to seek alternative sources for income.
COMMERCIAL REAL ESTATE: A New Source for Income?
Over the last 20 years, commercial real estate has produced income-driven returns, with more than 70% of its total returns having come from income, which has made it a complement to individual bonds and fixed income mutual funds in a diversified portfolio.1 Yet, many individual investors may be under allocated to commercial real estate, while institutions have long been investing directly in commercial real estate and realizing its potential benefits.1
POTENTIAL TAX ADVANTAGES
The recently approved legislation has significant positive implications for commercial real estate investors. Individual investors can access commercial real estate by investing in a real estate investment trust (REIT). With limited exceptions, dividends from REITs are generally taxed at rates applicable to ordinary income, which will be as high as 37%, currently. Thanks to the tax legislation passed in late 2017, special rules reduce taxation of certain income earned through pass-through entities and reduce the top effective rate applicable to ordinary dividends from REITs for taxable years prior to 2026 to 29.6% (through a 20% deduction for ordinary REIT dividends received that are not “capital gain dividends” or “qualified dividend income,” subject to certain limitations). This reduced tax rate could increase the after-tax dividend distributions and thus after-tax yields for REIT investors. Distributions that exceed both the REIT’s earnings and profits and the shareholder’s adjusted tax basis in its REIT stock are not return of capital distributions and are treated as capital gain to the shareholder. Speak with a professional tax advisor regarding your specific situation.
A COMPELLING COMPLEMENT TO FIXED INCOME
Thanks to commercial real estate’s historical income returns and availability of investor-friendly shareholder structures and enhanced liquidity features, we believe commercial real estate has the potential to complement the income benefits historically provided by traditional fixed income investments in an individual investor’s diversified portfolio.
Investing in commercial real estate assets entails certain risks, including changes in: the economy, supply and demand, laws, tenant turnover, interest rates (including periods of high interest rates), availability of mortgage funds, operating expenses and cost of insurance. This investment will offer limited liquidity options to investors. There is no guarantee of any return on investment and stockholders may lose the amount they invest. Real estate investment trusts (REITs) are not suitable for all investors. This is not an all inclusive description of the risks of a REIT product and investors should read the prospectus prior to investing in any REIT.4
To learn more about Investment Grade RE Income Fund visit www.igrefund.com