Once the Pandemic Recedes, Where Will the Real Estate Investment Opportunities Be?
The COVID-19 pandemic has been friendlier for some real estate asset classes than others. Proactive investors can take advantage of opportunities with potential to build up wealth and generate income from investment properties, especially tax-privileged investments.
Not all asset classes of investment properties are created equal. Some have a much greater inherent risk than others. This includes hotels, oil and gas-related properties, and care facilities for the elderly. These three types of property are at much greater risk for a variety of reasons, with the pandemic providing the most recent evidence of their volatility. It is best to avoid them altogether, unless investors are extremely satisfied with the potential loss of their invested capital.
The pandemic has been friendlier than others for some real estate asset classes:
- Industrial properties, in particular those that are occupied by logistics and shipping companies or that serve as distribution hubs themselves have developed particularly well, as the long-term trend towards e-commerce has accelerated. (Many people who previously opposed the delivery of goods and services to their homes embraced the concept during the pandemic.) The increased demand for deliveries is expected to have a positive impact on industrial real estate in the years to come.
- Apartment buildings also developed relatively well during the pandemic – despite eviction moratoriums – thanks to the help for tenants in the form of direct subsidies and rent payments as well as the forbearance of landlords. When the federal eviction moratorium expires, multi-family wealth can get a new boost when some units move.
- Office and retail properties were mixed during the pandemic, with suburban office prices rising in 2021 versus 2020, while downtown office property prices fell year-over-year, according to Real Capital Analytics sales price data for the second quarter. Meanwhile, retail property prices as a class have stabilized in 2021, with some sectors (such as net rentals) outperforming the retail market as a whole.
Options for investing in investment properties
There are several ways to invest in income property when the pandemic recedes. You can buy stocks of Real Estate Investment Trusts (REITs), buy assets directly and manage them on a daily basis, or invest in Delaware Statutory Trusts (DSTs) as a direct investment or turnkey 1031 exchange solution. All of them have their potential advantages and disadvantages.
Public REITs give you a high level of liquidity, but little variety from the broader stock market, as REITs tend to rise and fall with the stock markets. You will also have to pay capital gains tax on any REIT stock gains, which can result in tax liabilities of 40% or more.
Sole, direct ownership of investment properties is another way of unlocking the potential of the market for income and appreciation. But while many people are initially in love with being landlords, the real headaches of renters, toilets, and trash are enough to dampen the excitement of even the most exuberant investors. In addition, having all the eggs in one basket is no change.
With Delaware Statutory Trusts, investors have the potential in many ways to experience the best of both worlds: Direct real estate ownership of various assets without the hassle and hassle of a landlord.
DSTs can hold ownership of all types of investment property, with investors taking a passive stake. There is the potential to generate income (positive cash flow) and increase in value – just like with sole, direct ownership. There are other tax benefits from real estate investments, including depreciation allowances, to protect income. And DSTs, unlike many other real estate co-investment structures, are 1031-marketable, which means that any capital gains from the sale of assets can be deferred when the proceeds are reinvested in other income property … which can help investors build wealth .
DSTs have relatively low minimum investment amounts – typically $ 100,000. Many investors own stocks of multiple DSTs as a diversification strategy. Some DSTs are structured as fully liquid Delaware Statutory Trusts with no risk of foreclosure by a lender, and others are structured with non-recourse long-term fixed income financing for investors seeking a leveraged DST offering. To learn more about DSTs, visit www.kpi1031.com.
Where is the real estate market headed?
What lasting effects will the pandemic have on the investment property market? My crystal ball is in the store (please forgive me!) And some of the effects remain to be seen, including on the downtown office sector. Nevertheless, real estate is likely to remain an attractive asset class for many investors who are interested in diversification and the pursuit of income and appreciation. (As always, diversification does not guarantee profits or protect against losses, and income and appreciation are never guaranteed on investments.)
The key is to identify attractive opportunities, fully examine them, and consider the tax implications of the various real estate investment structures that have an impact on returns.
Securities offered by Growth Capital Services, a member of FINRA, SIPC, Office of Supervisory Jurisdiction, located at 582 Market Street, Suite 300, San Francisco, CA 94104. Potential returns and increases in value are never guaranteed and loss of capital is possible. Please speak to your auditor and lawyer for tax and legal advice.
This article is written by and represents the views of our contributing advisor, not the Kiplinger editors. You can review the advisor’s records with the SEC or FINRA.
Founder and CEO, Kay Properties and Investments, LLC
Dwight Kay is the founder and CEO of Kay Properties and Investments LLC. Kay Properties is a national 1031 exchange investment company. The www.kpi1031.com platform provides access to the marketplace of 1031 barter items, custom 1031 barter items available only to Kay customers, independent advice on sponsoring companies, full due diligence and review of every 1031 barter offer (typically 20-40 bids) and a 1031 secondary market.