Investors have historically been exposed to real estate income through direct investments in housing or premises for subsequent rental.
It is a long-term strategy in which the investor uses leverage through a loan to acquire a property and act as a long-term lessor. The benefits obtained come from the monthly rental income and also from the appreciation of the property against the costs of maintenance and conservation.
Typically these investors keep their property for more than 10 years and it tends to be common to obtain returns of 7%, although it will depend on the location and condition of the property. Some investors have achieved very high returns by exposing themselves to hot markets while others have experienced heavy losses due to deterioration in residential location coupled with maintenance costs.
However, this investment contains notable disadvantages which include the ability to withstand leverage, lack of diversification, time dedicated to managing it, and low liquidity that contribute to increasing risk.
When an investor decides to acquire a real estate, they can only finance one at a time, which means that although they can add diversification to their investments has a lack of diversification within the real estate asset class. For example, in a case in which the owner of a residential property saw a subsidence of the same, he would be overexposed to the derived losses.
On the other hand, Dealing with tenant issues can be complex due to delays or defaults. The Spanish legislation does not help especially since together with the French and Danish there is an overprotection of tenants against the rights of landlords.
Financing can be another downside. Many investors need to take out a mortgage in addition to the one they already have, which adds risk to their personal finances. And, despite the low interest rates, not all show an excellent credit profile to increase their leverage.
As a solution to this problem we must mention co-ownershipJoining with other investors to expose ourselves to the real estate market will allow us to dispense with leverage and increase our diversification.
A joint ownership agreement gives you all the rights and privileges that come with real estate. This includes a pro rata home equity and income earned, the right to sell, and free use of the property according to your share.
The maximum exponent of co-ownership is found in SOCIMIs because it is possible to invest in a large portfolio of real estate assets that offer the same benefits as direct investment. They contribute to the Spanish real estate market diversification towards rental with the participation of specialized entities and an extra capacity to attract financing from new investors.
These are investment products linked to real estate rental, until now with a reduced presence in investor portfolios, especially for retail investors who traditionally bet on buying and leasing. Both in terms of risk diversification (due to the possibility of investing in portfolios with different properties), as well as the professionalization of management, they are an interesting option.
Due to the strong dividend income that REITs provide, they are an important investment for both retirement savers and retirees who require a continuous stream of income to cover their living expenses. Your dividends are substantial because they must distribute at least 80% of the profits to its shareholders annually.
Due to the modification of the Corporation Tax for SOCIMIs, the 20% of the remaining profit that is not dedicated to shareholder remuneration is taxed at a rate of 15%, therefore there are incentives to distribute more dividends to avoid the fiscal impact of this measure and that the shareholder receives more for their investment.
Ultimately, your dividends are fueled by the steady stream of rents paid by the tenants of your properties. Relatively low correlation with stocks and fixed income investments, which optimizes diversification and helps reduce the overall volatility of a portfolio.