Investment returns can be taxed in one of two ways. The first is capital gains, which is when an investment’s price increases between the purchase and sell date. If an investor bought a stock for $20 and sold it for $25, they will owe $5 in capital gains taxes. If they hold the asset for less than a year before selling it, they will pay short-term capital gains, meaning the gains will be added to their taxable income and overall federal income taxes. If they held the investment for a year or longer, they will instead pay a long-term capital gains tax where their return is taxed based on specific income-driven brackets that are generally lower than their federal income tax brackets.
Investment returns can also be taxed if an investment directly passes along income such as dividends for stocks and interest for bonds. In most instances, this income is added to someone’s taxable income and taxed based on their federal income tax brackets. One notable exception is qualified dividends.
Unique REIT Tax Considerations
REITs operate with a unique structure that create some differences in how investors incur and pay taxes. That’s because REITs are required to pass along at least 90% of their taxable income to shareholder, which means that this distribution is the primary means through which an investor is taxed.
Within this distribution, income can be classified into one of three categories that each have different tax implications:
REIT Tax Benefits
In addition to its unique structure, REITs also have some unique tax benefits that can serve investors. The first is the 20% Qualified Business Income Deduction, which may allow REIT managers to deduct up to 20% of operating profit income from their taxes. Investors will receive this tax benefit regardless of their taxable income, which makes this deduction incredibly compelling.
Second, REITs avoid double taxation. For many investments like stocks, businesses must pay a corporate income tax on the company’s yearly taxable income. These taxes directly reduce how much money that a company can either reinvest in the business or distribute to investors. REIT managers do not have to pay corporate income taxes, which increases the pool of money that managers pass to investors via distributions.
*Please consult a tax professional about your personal portfolio and tax needs.*
Future articles in this series will dive into the various ways that our logistics REIT can add value.
The fourth piece in our “Let’s Talk Logistics Real Estate” series focuses on retirement planning. Individuals investing for retirement should understand the value of real estate in their portfolio. Investors can no longer unlock their wealth’s full potential by relying on the “traditional” mix of stocks and bonds that once served them so well.
Read on for an overview of real estate’s value in retirement plus a three-step process for how to invest in NOYACK’s logistics REIT. Be sure to check out articles one, two and three in our series if you missed them.
Retirement investors often want to check a few boxes with their investments. One of the most important ones is to maintain a consistent source of income in support of spending needs. REITs are a great choice to check this box because they must pass along 90% of their income via dividends, which introduces a level of income consistency that’s difficult to find in other investments.
Many investors also seek stability because selling a volatile investment at a low can lock in losses and introduce sequence-of-return risk. REITs achieve stability for retired investors through the 90% income distribution mandate by giving their investors a consistent source of income, allowing them to reduce their sequence-of-return risk that would be assumed through the inopportune liquidation of traditional assets. Further, REIT property managers can also raise rents in response to inflation-driven instability, and our logistics REIT even includes properties with special provisions that move in lockstep with certain inflation measures. We offer even further stability through diversification in our real estate. Specifically, we invest in five broad property asset classes and also diversify within each category.
Step 1: Determine eligibility
Investors looking to make an allocation to real estate for their retirement account must first determine whether they meet the qualifications to be an accredited investor with one of two criteria. First, anyone qualifies if their income exceeds $200,000 ($300,000 with a spouse) for the two prior years and is reasonably expected to maintain that income for the following year. Second, anyone qualifies if their net worth (either or alone or with a spouse) exceeds $1 million.
Depending on how you qualify, you have three options to verify your accredited investor status. You can verify both income or net worth through obtaining written confirmation from a broker-dealer, registered investment advisor, licensed attorney, or CPA. More details about this option and the other two are discussed here.
Step 2: Confirm suitability
If those investing for retirement qualify, they must also consider a few parameters around investing in the fund. First, there is a minimum investment of $20,000. Second, they must consider how much income that they would like to receive annually while invested. The fund targets an approximately 6% annual cash flow and an investment return that is between two and two-and-a-half times its initial value at the end of the 5-7 year time horizon. Investors can reinvest their annual cash flows if they would like to increase the amount they receive at the end of their investment time horizon, but this will limit how much money they can access during this period.
Step 3: Rollover funds
Finally, individuals looking to invest in our logistics REIT through an IRA must have a self-directed IRA, which is similar to a typical IRA except that it allows investors to purchase alternative investments such as private real estate. NOYACK can help you to find a provider to help set up this account as well as rollover funds from another IRA or 401(k) into the self-directed IRA.
On Wednesday, November 2nd, the Federal Reserve raised interest rates by three-quarters of a percent. This hike is the sixth time that the organization raised interest rates in 2022, and it marks the fourth consecutive time that rates have been raised by 0.75%.
Those invested in real estate might be concerned about how rising interest rates impact REIT investments. We’re not concerned about its impacts on our logistics REITs for the following three reasons.
1: REITs do better than you may think in high-rate environments
Investors are often concerned that higher interest rates can negatively impact real estate returns. Many property owners rely on financing to hire labor, purchase building materials and even purchase properties. When interest rates increase, financing costs can increase, which hurts profitability.
However, REITs have historically performed well in lieu of these costs. Data from the S&P Dow Jones shows that REITs have strong overall performance despite periods of high inflation. Further, in four of the last six high-interest rate environments, REITs earned a positive return. They even outperformed the S&P 500 in three of those periods. Given this information, there may be less of a connection between REITs and high interest rates than previously thought.
Further, our logistics REIT allows us to finance many properties at lower interest rates than today. Through our UPREIT structure, we can acquire properties and maintain their original financing, which includes the interest rates that were often determined years ago. These rates are often notably lower than what we’ve seen in recent days.
2: Our properties can raise revenue alongside interest rates
The Fed is quickly raising interest rates because of how quickly inflation is growing. In September, inflation increased at its fastest pace in the past 40 years. In response, the Federal Reserve is raising interest rates to tame rising prices by increasing the cost of borrowing.
Interest rates and inflation are closely connected in this environment, and that’s good news because our REIT is designed to hold up well against inflation. Real estate in general holds up well to inflation because property owners need significant time to build new property. As a result, these owners can charge higher prices on their rent in response to inflation given the lack of options.
Further, many of our REIT properties directly raise rents and prices with inflation. Our logistics and warehouses are under special long-term contracts that require annual rent raises in accordance with the CPI index, which is a common measure of inflation change over time. In addition, parking within our mobility hubs operate under dynamic pricing, which allows us to immediately raise costs in response to inflationary environments.
3: Rates don’t impact our long-term investment conviction
We believe in long-term investments within logistics real estate given how much supply is outpacing demand. In the past 5 years, digital commerce has grown 140% to a $2.4 trillion market opportunity, yet the supply of real estate infrastructure to meet that demand has increased only 25%. As consumers demand better digital commerce experiences, those who invest in properties that support these experiences have the potential to reap significant profits. This long-term outlook isn’t negatively impacted by high interest rates.
In fact, high interest rates can even be an advantage. High rates are causing building prices to fall, which allows us to purchase properties at more affordable prices and therefore provide investors with better long-term returns.
The third piece in the Let’s Talk Logistics Real Estate series focuses on supply and demand. Within the topic are some nuances that showcase the value of real estate both generally and within our real estate asset classes.
Read on for a refresher on the topic, how supply and demand impact other investments differently than real estate, and why logistics REITs are particularly well-suited to profit from the imbalance. Don’t forget to check out articles one and two if you missed them.
Supply and Demand 101
Supply is how many goods are produced at a certain price point, and demand is the number of goods desired or purchased at a certain price point. As price increases, supply tends to increase as businesses want to sell more goods for a higher profit, and demand tends to decrease as fewer customers can afford the goods. In equilibrium, the amount of goods supplied equals demand at a particular price, so equilibrium establishes an optimal point where price and quantity sold are set.
These ideas are built on assumptions that don’t always hold. For instance, supply or demand can be inelastic, which means they cannot freely shift. If supply is inelastic, the business may be unable to increase production with demand increases. In this scenario, the business can charge a higher price for the same amount of goods to narrow the growing pool of interested customers.
How supply and demand affect investments
Most investments are traded on an exchange where supply and demand have a degree of elasticity. If more consumers demand a stock, they’ll place more orders to purchase it via an exchange. In response, traders can sell more of their available stock to investors. They may also increase their asking price for stocks, but they can also pull the lever of increasing supply.
With investment real estate, it’s much more difficult to increase supply because property can take months or years to develop. As a result, property owners can raise prices in high-demand environments and still sell the real estate, and investors, therefore, earn additional profits.
One real estate subcategory that’s experiencing particular demand increases is logistics commercial real estate. First, the pandemic caused companies to reckon with increased costs and inefficiencies from international supply chains. As a result, both large and small companies are participating in onshoring, or relocating supply chains to exist within their domicile. Second, consumers have new lifestyle preferences and needs. They now prefer delivery within the same day (or a few hours), and they’re more interested in organic and healthy products, which often require storage in cold warehouses before delivery.
Our logistics REIT capitalizes on supply and demand:
Our logistics REIT allows investors to capitalize on the above demand increases as well as supply inelasticities. In fact, we’re using these trends to prioritize some of our five asset classes in 2023:
The second piece in the Let’s Talk Logistics series focuses on investment stability in recessions. It’s a particularly newsworthy topic given our current market environment. Equities, bonds, and even some alternative investments have all fared poorly. Given this unique environment, it’s important to consider additional investment options that are better accommodated to hold up such as private investments.
Read on for more on why investors should prioritize stability in recessions, how some typically stable investments have held up, and why logistics REITs are designed to provide safety in this market.
In recessionary environments, stability is important because it helps investors avoid the negative consequences of volatility or erratic and significant price movements. In market downturns, highly volatile investments can experience sharp price drops. Investors want to avoid this scenario because if they must sell, they’re locking in returns at a relatively low price. Another consequence of selling at a low is that it forces an investor to withdraw a greater proportion of their portfolio. When a market rally occurs, they’ll have less money invested to soak up a high return.
That last concern is particularly important for early retirement investors because of sequence-of-return risk, or the chance that negative returns occur when an investor begins to withdraw from their portfolio. This scenario can drain a larger proportion of their portfolio early into retirement and reduce the likelihood that their portfolio will sustain their retirement needs. For these reasons, it’s important to have a healthy amount of your portfolio in investments that remain stable even in market downturns.
How typically stable investments are faring
Investors typically use bonds to provide stability in recessions, but most aren’t holding up well given rising interest rates amid inflation. Bond yields have fallen, and corporate have performed particularly poorly since recession fears have introduced concerns around financial distress. Treasuries and shorter-duration bonds are faring better, but this stability comes at the expense of long-term return given that these yields aren’t outpacing inflation.
Other stable investments have also performed poorly. With rising interest rates, tangible assets like gold are hitting two-year lows. With typically stable investments experiencing volatility, investors might wonder where they can go to maintain stability.
Why our logistics REIT is more stable:
NOYACK’s logistics REIT is a solid option for investors in this environment for a few reasons. First, it’s part of the REIT asset class that generally offers stability. These investments are required to distribute almost 90% of their taxable income in the form of dividends via their rental income, which is prone to remain stable even amid large market swings. Second, REITs can offset inflation through price raises in rent contracts. (Our properties even have special provisions that raise rent in lockstep with inflation.)
Second, our logistics REIT offers unique diversification benefits. We invest across five broad property asset classes: Dry storage, cold storage, life sciences, medical offices, and mobility hubs. Each property represents growth opportunities in different industries. We also diversify within each individual category, with some examples provided below:
Retirement investors have a long wish list of what they’d like in an investment. Many want a few performance factors such as high return potential, protection from downside losses, and a steady source of income. They also want an investment with relatively inexpensive fees. Oh, and it should fit into their retirement plan.
While many investments check a few of these boxes, NOYACK NLI logistics REIT is tremendously valuable because it checks all of them (and more). To understand each factor, Let’s Talk Logistics is a new series that examines one aspect in each article where our logistics REIT adds value. Our first piece is focused on inflation.
Simply put, inflation is a rise in prices. This rise generally occurs because of lower supply (e.g., difficulty in acquiring goods) or higher demand (e.g., more customers). Inflation is an important investing concept because it erodes your investment return’s value. Imagine that both your return and inflation are 7% for a year. While you earned a return, it’s only allowing you to maintain the amount you can purchase rather than increasing it. If inflation’s higher than your return, you can even have less purchasing power than when you started.
Inflation has recently reached its highest annual level in four decades, which has made the concept a high-priority topic. Many retirement investors rely on investments that provide a consistent cash payout to fund their needs, so inflation could threaten their standard of living.
How other investments fare against inflation
Overall, stocks hold up better than bonds to inflation. Many bonds pay a consistent amount of interest over a given period. Few adjust this amount for inflation, and those that do (Treasury Inflation-Protected Securities) often have minimal return opportunities. Meanwhile, many stocks pay consistent income via dividends, and each has a dividend growth rate: A measurement of the payout’s annualized percentage increase. In other words, high-dividend growth stocks are inherently designed to increase their payouts, which can help to offset inflation.
But these investments aren’t foolproof protection. A company’s dividend is tied to its performance, so dividend growth could lag inflation in periods of poor economic performance. Some experts fear that we’re entering a recession, so high inflation could continue at a time when companies lack the revenue and profits to maintain a dividend increase.
Our Logistics REIT offers superior inflation protection
In general, real estate protects against inflation because it’s a hard asset, or something that’s tangible and therefore holds an intrinsic value. Since property owners need significant time to create more land and shelter (supply), property owners can raise rent prices in response to inflation with minimal impacts to demand. Further, most REITs have a few characteristics that aid in their protection from inflation:
Further, NOYACK’s Logistics REIT has unique properties that provides even better inflation protection. We select logistics and warehouse properties that are leased under special long-term contracts. These contracts include stipulations that require annual rent raises in accordance with the CPI index, which is a common measure of inflation change over time. Our logistics REIT, therefore, grows in lockstep with inflation.
Investors are also well-suited to take advantage of this inflation protection via income returns. We distribute at least 6% of our portfolio’s value annually to investors, which itself is notably larger than the roughly 3% yield on public REITs. Inflation-driven rent increases will raise the value of our portfolio and therefore the amount of a 6% annual distribution.
Further, investors can maintain this income growth while maintaining high earnings potential. We target a 16% to 18% investment rate of return (IRR), which is significantly higher than the historical performance of stocks and bonds.
Future articles in this series will dive into the various ways that our logistics REIT can add value. Some factors that we’ll cover include wealth preservation, volatility, tax advantages and fees. Come back every other Thursday for a new deep dive.
CJ Follini, Managing Principal and CIO of NOYACK Capital, will shares his investing journey and explain the power of investing in supply chain real estate. NOYACK’s first offering, NOYACK Logistics Income REIT, operates with the conviction that logistics assets are undervalued relative to the market maturity of e-commerce.
Learn how investing in supply chain real estate can be ideal to meet your needs providing a tested hedge against inflation, stable yield and a share construction ideally suited to tax advantaged retirement vehicles such as Roth and 401K IRA’s while providing optimal wealth preservation.
Over the past 5 years, digital commerce has grown 140% to a $2.4 trillion market opportunity, yet the supply of real estate infrastructure to meet this demand has increased only 25%, which will drive increasing revenue the next decade. Our firm, NOYACK Capital, has a 40-year track record with average annual returns of 22.4%, and has recently built a private REIT to invest in diversified supply chain assets supporting the digitization of the U.S.
For more information about how you can invest in Noyack Logistics Income REIT, click here.
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