At LEX, our mission is to empower wealth creation by solving real estate’s access and liquidity problems. The LEX platform can be a great tool for investors to broaden their investment portfolio beyond just stocks and bonds via access to real estate assets that were not accessible in the past.
Investing in real estate can help you create wealth and generate income in several ways:
1. Appreciation. Like stocks, real estate can increase in value. (Also like stocks, real estate can decrease in value.)
2. Income. Like bonds, real estate can pay you income, consisting of your share of income derived from the rent received from tenants. (Rental revenue is only promised for the duration of each lease, so income may be reduced if any vacancies occur or to cover other expenses.)
3. Leverage. Because most real estate properties use mortgage debt, equity holders’ gains (and losses) are magnified by the leverage ratio of debt to equity. For example, if a $10M building with a $6M mortgage, and $4m of equity, increases in total value by 10% (from $10M to $11M), the value of the equity holders’ interests increase by 25% (from $4M to $5M).
4. Amortization. As the mortgage debt is paid down over time, the value of the equity holders’ interests increase by the amount of principal repaid even if the value of the building as a whole stays the same. For example, if the $6M mortgage debt is paid down to $5.5m on the $10M building, the value of the equity holders’ interests increase by 12.5% (from $4M to $4.5M) even if there is no change to the value of the building at $10m.
5. Fixed-Rate Refinancing. Because mortgages are often fixed-rate, and mortgage payments typically consume a large portion of the building’s revenue before income distributions are made, equity holders can increase the amount of their income distributions by seizing any opportunity to refinance the mortgage to a lower fixed rate.
6. Lower Volatility. The underlying value of a real estate asset tends not to change much in the short term. This can be very attractive to investors who may want to diversify a portion of their investments away from volatile stocks and alternative investments.
7. Inflation Protection. When consumer prices go up, the value of many assets do not, resulting a loss in real value. But rent prices have historically also gone up when consumer prices go up, meaning that real estate values typically keep pace with inflation.
8. Tax benefits. Direct investment into real estate is more tax efficient, compared to non-real estate investments and most publicly traded REITs. The tax code allows real estate investors to both defer when their taxes are due and to classify a portion of what might otherwise be treated as income as capital gains, which are taxed at a lower rate. Additional details available here.
As you think about diversifying your portfolio into Real Estate, or building onto your existing Real Estate holdings, it’s important to understand basic concepts related to Real Estate valuation. This brief overview reviews a few of the fundamental methods used to value a real estate asset.
The Internal Revenue Code contains several provisions allowing owners of real estate to both defer when their taxes are due and to classify a portion of what might otherwise be treated as income as capital gains, which are taxed at a lower rate. These benefits make real estate investing more tax efficient than investing in other income-generating products such as corporate bonds.
LEX offers a new way to invest in individual commercial real estate buildings. While we’ve designed our platform to be simple and intuitive, it’s important that our investors understand how the LEX investment process works, and how deals arrive on LEX. Here’s a brief overview of the lifecycle of a LEX deal, and what the various “stages” of assets shown on the LEX platform mean.
Our mission at LEX is to empower wealth creation by solving real estate’s access and liquidity problems. Real estate deserves liquidity, and all investors deserve access. Solving these two problems in the real estate market will enable a new generation of more widespread wealth creation.
The following feature was originally published on Bisnow.com and written by Julia Troy, in collaboration with the LEX team. We are republishing a version of it on the official LEX Blog with permission below.
Real estate investment trusts (REITs) have generally been the best available option for individual investors eyeing commercial real estate. Is that changing?