First, let’s discuss the many good things about a Real Estate Investment Trust – or a whole fund of them. Outside of Real Estate IRA owners, the vast majority of retail investors purchase REIT shares for their retirement portfolios via REIT mutual funds, or in an individual REIT whose shares are publicly traded on the stock market.
This is great for a couple reasons: Funds allow investors who may be novices to real estate investment instant diversification with one transaction. And, of course, it takes a lot less effort and capital to simply buy a few REIT shares with the click of a mouse than it does to scout out, bid on and close on promising investment properties for a Real Estate IRA.
Further, larger publicly-traded REITs and REIT funds also allow the investor to sell very quickly and easily. That is, the shares are quite liquid. If you need your capital back, you can get it practically right away.
But experienced Real Estate IRA investors know that there is a price to be paid for that liquidity and that convenience. A very steep price, as a matter of fact. And there is a name for that price: We call it the liquidity premium.
Simply put, all other things being equal, investors generally wind up paying more for liquid assets than illiquid ones – and this drives down returns in the long run.
Consider: This academic research paper compared assets in publicly-traded REITs and non-traded REITs. First they cited earlier research that found that “REIT prices on average embedded a 12 to 22 percent liquidity premium over the 1985-1992 time period.” They then roughly confirm the results of the earlier research: “We find evidence of a significant liquidity premium in REIT prices relative to property NAV that varies systematically with the liquidity of private real estate. Our findings also indicate a significant role for sentiment in REIT prices, returns, and the timing of both initial and seasoned REIT equity offerings over the post 1992 REIT era.
The takeaway: people who invest directly in real estate – including non-traded REIT managers and the investors who hire them – get a much better deal on real estate.
And they get it with much less price volatility. How do we know this? Because as writer Ian Appolito notes: the FTSE NAREIT US Public REIT Index has a lot more frequent down years than does the NFI-ODECE Direct Private Investment Real Estate Index. In fact, between 1978 and 2014, publicly listed REITs lost money twice as often as direct ownership of real estate – 8 years versus 4, with bigger up and down price swings.
Why? Because publicly traded REITs are much more closely correlated with the stock market – and the stock market is nuts.
Sure, real estate investors are nuts sometimes, too. Especially in Las Vegas, Phoenix and Florida. But stock market investors are nuts all the time. Hence the wild swings between overvaluation and undervaluation.
Now, if you’re a REIT investor, that higher volatility would work for you – if you were buying in a terrible year for real estate prices like 1998 (when knuckleheads were selling good real estate or borrowing against it to buy Internet stocks) or 2008.
But we are not living in 2008 anymore.
If your self-directed IRA is long-term money – meaning you won’t need to cash it out for five or ten years or more, the evidence is overwhelming: The liquidity premium over that period of time results in lower returns on investment on average, which takes a huge chunk out of your total wealth compared to what you can expect with direct ownership in a Real Estate IRA – at considerably less volatility.
If you don’t need the liquidity – don’t pay a premium for it.
American IRA specializes in supporting Real Estate IRA investors and real estate 401(k) investors. We are huge believers in direct ownership, and unlike most off-the-shelf Wall Street investment companies, we have experience and the processes and expertise to support the administration of self-directed IRAs and Real Estate IRAs.
To learn more, call us today at 866-7500-IRA(472), or visit us online at www.americanira.com.