The first advantage that LEX has over the competition is access. Any U.S. investor can invest with LEX, regardless of accreditation status. To be an accredited investor requires earning $200,000 (or $300,000 together with a spouse) in income over each of the last two years, or having a net worth over $1 million. The accreditation requirements of many real estate investing platforms, including Cadre and EquityMultiple, rule out the majority of investors who would benefit from the wealth-building benefits of direct real estate ownership.
Secondary trading, and the liquidity it provides, is another unique benefit of investing with LEX. Many direct real estate investments lock up your capital for a 5+ year hold period. If you’re a minority partner in a real estate investment, there are limited options for selling your stake, and if you need to exit your investment early you’ll likely be selling at a discount. LEX has solved for this by building a secondary marketplace, an SEC-registered trading system (ATS). The LEX ATS continuously matches orders during trading hours, facilitating transactions without lockups or trading periods. What this means is that your LEX securities trade just like any other stock in your portfolio. While we can’t guarantee liquidity, the features of our platform encourage it and are not available in private real estate investments.
Many of our competitors, including Arrived Homes and Roofstock, focus on residential assets such as single family rentals. While these asset classes can have a place in a diversified portfolio, the return profile of commercial real estate is different. This is because of unique factors such as longer lease terms, the diversity of tenants across industries, and the higher costs of commercial development (which offers a protective moat for existing assets). LEX is further differentiated because securities aren’t pooled on our platform, unlike a REIT. This allows investors to evaluate the risk and return profiles of individual commercial properties and compile a portfolio of single asset real estate that meets their investment goals.
Another overlooked but important aspect of investing with LEX is our robust underwriting process. LEX is a FINRA registered broker-dealer and our real estate investment banking team conducts extensive due diligence on every asset listed on our platform. This due diligence covers the financials of the asset, but extends to the management team. Our team's depth of industry knowledge allows us to identify talented management teams that can extract the most value from an asset. Because LEX deals are structured such that the owner retains a majority of the equity, management teams still have “skin in the game” and are motivated to operate the asset efficiently and attempt to produce healthy returns for shareholders.
Pass-through taxation is a final benefit that LEX offers. Pass-through taxation means that the income produced by an asset on the LEX platform passes directly to shareholders, who pay personal income taxes for their share of the business. LEX investors receive a Schedule K-1 each year. This is in contrast to the Form 1099 that’s issued by some of our competitors, which treats investment distributions as ordinary income. For example, REIT dividends are taxed as ordinary income to shareholders, and REIT shareholders do not receive additional deductions for depreciation. Our unique structure allows investors to earn quarterly distributions while reaping the benefits of amortization and depreciation to potentially reduce their overall tax liability.
September 20, 2022
The goal of this article is to offer practical guidance on how to begin building a real estate portfolio, and how the risk and return profiles of different assets fit together.