EMPLOYEE BENEFIT CONSULTANTS | RETIREMENT PLAN ADMINISTRATORS | REGISTERED INVESTMENT ADVISORS
Investment in Real Estate
Real estate can be a useful choice in a plan providing
participant directed investment choices.
Real estate may provide income from three sources –
rental or lease payments received from the user of the
property, fees earned by real estate managers, and capital
gains from the sale of appreciated properties. The total
return from these three sources can be attractive.
Real estate shares some of the characteristics of
commodities. There are no patents or other intellectual
property rights to restrict entrance into the market,
and prevailing prices are closely related to supply.
Overbuilding depresses prices while tight supply
Real estate shares some of the characteristics of fixed
income or bond securities. Property values tend to rise
and fall in inverse relationship to the trend of current
interest rates. Real estate provides current income,
which makes it less volatile than equity securities,
particularly those equity securities which provide
no current income (dividends).
Real Estate Investment Trusts / REITs
While direct ownership of real estate by qualified
retirement plans is considered a permissible asset
by the IRS, there are significant problems. Real estate
is not liquid. That is, while you can sell any security
listed on the NYSE and receive your cash in three days,
it can take months to effect a real estate transaction.
Real estate transactions are costly – you can purchase
$2 million of common stock for less than $10; a similar
real estate transaction may cost $100,000.
Enter the real estate investment trust, a corporation
in the business of buying, developing, managing and
selling properties. The REIT is required to pass through
to its shareholders the income from its operations and
pays no corporate taxes, similar to the tax treatment of
Many REITs have a regional focus – they invest in
properties in the southeast, the Washington – New