on there being sufficient distributable cash after other ex- penses are accounted for. Generally, however, the sponsor- ing real estate companies try to budget carefully so as not to disappoint investors. Further, investors’ interests are aligned with the sponsor’s by restricting such companies from with- drawing cash for themselves until the investors have been paid their expected returns. Stable income can provide some degree of protection during periods of stress in the financial markets. Real estate is different from stocks in this respect—the income component accounts for a much larger portion of total returns than it does for stocks, for example. And recent low interest rates have made real estate income properties comparatively attractive. THAT INCOME CAN ALSO LEAD TO LOWER VOLATILITY The income component of commercial real estate general- ly helps temper its volatility as compared to asset classes like stocks, where price movements constitute a bigger portion of overall return rates. Commercial real estate business cycles may be less pronounced because rental lease terms generally help mitigate economic fluctuations and their impact on income. CROWDFUNDING OF COMMERCIAL REAL ESTATE – A KEY TO BETTER TOTAL RETURNS? Dividends or other regular payouts are paid from real earnings and in hard dollars. They cannot be manipulated by creative accounting. The regular payout of income can act as a useful barometer for identifying investment projects that are disciplined and efficient in their capital allocation and cash flow management. Many argue that commercial real estate has other desirable characteristics, such as its serving as a hedge against inflation, providing a portfolio diversification away from stocks and bonds, offering potential tax benefits for equity interests, and its nature as a hard asset. Its ability to provide current cash flow, however, is a key component in making it a compelling asset class. When done correctly, commercial real estate investing encapsulates the age-old investment theme of focusing on investments that maintain, and even grow, their income over time. • Lawrence Fassler, an attorney and real estate investor, is Corporate Counsel of RealtyShares, a leading real estate investment marketplace that places equity investments through North Capital Private Securities Corporation; a registered Securities broker-dealer, and member of FINRA/SIPC. RealtyShares as an institution does not advise on any legal issues, and this article is for general information only and does not represent professional legal advice. Contact the author at lawrence@realtyshares.com.
PAST PERFORMANCE NO GUARANTEE OF FUTURE RESULTS
6%
5%
4%
3%
2%
1%
0%
CRE CORPORATE BONDS
PUBLICLY TRADEDREITs
STOCKS GOVERNMENT BONDS
CASH
Past performance is no guarantee of future results. SOURCES :: National Council of Real Estate Property Index (NCREIF NPI) (CRE); Moody’s Baa Corporate (Corporate Bonds); National Association of Real Estate Investment Trusts (NAREIT) All Equity REITs (Publicly Traded REITs); S&P 500 (Stocks); 10-Yr US Treasury (Government Bonds); 3-Month US Treasury (Cash)
THE IMPORTANCE OF DIVIDENDS Value of Initial Investment of $10,000 in S&P 500, 1926-2005
• With Reinvested Dividends - Price Only
$33,094,516
$10,000,000
$1,225,321
$1,000,000
$100,000
$10,000
$0
1929 1937 1949 1957 1965 1973 1981 1989 1997 2005
professional fix-and-flip borrowers, “preferred equity” stakes that offer higher potential returns (and more risk) and equity interests offering potential appreciation upside. RealtyShares, for example, offers investors a chance to participate in interest or rental payments from various types of commercial real estate ventures. These can include large multifamily apartment complexes, retail shopping centers, pools of single-family residences, self-storage facilities, office and industrial buildings and hotels. The recurring cash distributions can occur through the receipt of monthly loan interest payments, monthly preferred equity distributions or quarterly payouts on conventional equity investments. Debt and preferred equity investments generally have strong remedies available to them if payout schedules are not met. Equity payouts are more like dividends, dependent
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