Trading Up Could Result in Depreciation

The term "useful life" of real estate is what is meant when people talk about depreciation. Depreciation is a mechanism that might potentially lessen the amount of taxable income you make from investment real estate. In general, a residential rental property will have a depreciation schedule of 27.5 years, while a commercial property will normally be deemed to have a schedule of 39 years. What happens, therefore, if you have been the owner of your investment property for a good number of years and you have exhausted all of the depreciation that you were able to claim on your income property?

Performing a 1031 exchange could provide you with the opportunity to get a new depreciation schedule from an asset that has already been fully depreciated, which could in turn lead to a reduction in the amount of income that is subject to taxation. However, simply engaging in a 1031 exchange is not sufficient on its own; for the 1031 exchange to be valid, the newly acquired property must have a higher value than the property that is being sold.

For instance, if you sold a property worth $500,000 that had been fully depreciated and then purchased another property for the same amount, you would not gain a new depreciation schedule because the previous cost basis would transfer to the newly acquired property. This would prevent you from gaining a new depreciation schedule. If, on the other hand, you sold your home for $500,000 and then bought another property for $1,000,000 afterward, then you would have increased your cost basis and would be eligible to deduct the newly acquired higher cost.

Delaware Statutory Trusts, sometimes known as DSTs, have the potential to be an excellent answer for those who are interested in engaging in a 1031 exchange but would also wish to "trade up" their cost basis and depreciation schedule. Perch Wealth is able to provide accredited investors with direct share transactions (DSTs) that include pre-existing, non-recourse financing.


This may make it possible for the accredited investors to plan how they want their exchange to be structured and may also make it possible for them to discover a way to legally shelter more of their income by increasing their cost basis. We are also able to provide investors with debt-free DSTs, which can be included in a diversified investment portfolio, or if investors simply want to remain debt-free on their real estate assets. These debt-free DSTs can be used for a variety of purposes.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

Alternative Investment Funds for Cash Investors

Investors today face a difficult market. Interest rates at conventional banks are extremely low. The stock market trades at record highs one day before falling the next as a result of persistent volatility. Understandably, some investors become anxious as the stock market swings back and forth. So what are some alternative investment options for cash investors?

The question of where to turn next arises for cash investors trying to diversify their holdings. Unsure of what to do, some people choose to take no action. According to some estimates, $14 trillion is currently lying in money market accounts earning next to nothing. Better options must exist, and they do.

This article examines macroeconomic investing trends as well as some of the various investment options available to people looking to diversify their portfolios using real estate.

Trends in the Market Today

The average return on high-yield bonds was just 3.32 percent between 2011 and 2020. (source: Morningstar Direct, Standard & Poors, Yahoo Finance, Federal Reserve Economic Data). In comparison to investment grade bonds, Treasury bonds, and Treasury bills, which generated average returns of 1.42%, 0.92%, and 0.09%, respectively, during this period, high-yield bonds are typically seen as one of the "better" investments. In conclusion, even the bonds with the best performance over the past ten years hardly kept up with inflation.

By making stock market investments, investors haven't done any better. Over the previous 20 years, the average yearly fall in stocks was 16%. (source: Morningstar Direct, S&P 500 maximum drawdowns by year).

Typically, 60% of an investing portfolio is made up of stocks and 40% of bonds. Therefore, it seems sense that investors would want to diversify their holdings. One method to achieve this is by making institutional-quality real estate investments.

Various Investments

An alternative is to put money into a syndicate or fund for commercial real estate. For instance, Delaware Statutory Trusts permit accredited individuals to invest alongside many others in institutional-quality real estate. As a result, the entry barrier is lowered and direct ownership is made possible, with an experienced third-party sponsor managing and supervising the property in all other respects.

Investments in funds, syndications, and DSTs, however, are frequently illiquid. Depending on the planned business plan and hold time, this may require an investor to commit their funds for a period of three to seven years or longer. If they are interested in adding real estate to their portfolios, those who want to preserve additional liquidity opportunities have a few different options.

Periodic Funds

A type of closed-end fund known as an interval fund provides investors with liquidity at predetermined intervals, usually quarterly, semi-annually, or yearly. This implies that shareholders may periodically sell a portion of their shares at a price determined by the net asset value of the fund. Investors may not always be able to sell their shares during a specific redemption period. As a result, interval funds should normally be viewed as long-term investments; yet, they will typically charge a premium for illiquidity.

Real estate is just one of the various assets and asset classes that may be purchased with interval funds. A single interval fund is not constrained to investing in a single asset class; rather, they can do so to diversify their holdings by purchasing a variety of assets.

Trusts that invest in real estate

Real estate investment trusts, or REITs, are businesses that hold and/or manage commercial real estate that generates income. REITs come in a variety of forms. The majority will concentrate on a certain product category (such as retail, hospitality, multifamily housing, senior living facilities, student housing, office, self-storage, industrial, and similar) or geographic area (e.g., commercial real estate in the Northeast vs. Southwest).

A person purchases a share in a REIT when they want to invest in a business that owns and operates rental properties. Shares of publicly traded REITs can be bought and sold just like other equities, even on a daily basis, giving investors a lot of liquidity.

REITs frequently have precise investing criteria. They then make investments in properties that fit such criteria. REITs are obligated by law to distribute 90% of their income as dividends to shareholders.


Funds for Other Income

Investment funds come in dozens, if not hundreds or thousands, of distinct varieties. These include hedge funds, money market funds, mutual funds, bond funds, and equity funds. Through one of these kinds of funds, many investors have started making real estate investments.

A specific type of funds known as a real estate income fund is dedicated solely to real estate investments that provide income. Those wishing to invest cash in sizable commercial real estate portfolios have another entry point in real estate income funds. Retail investors who want to acquire institutional-quality real estate that is otherwise out of their price range find real estate income funds particularly intriguing. A real estate income fund pools money from numerous investors, and its sponsor then manages every aspect of the fund's operations, from due diligence and underwriting to property repairs, stabilization, continuous management, and ultimately sale. A real estate income fund may have various investment minimums and lengthy hold periods depending on its structure; as a result, the invested capital should be regarded as illiquid throughout that hold period.

Examples of Funds Perch Wealth Offers

Perch Wealth offers a number of vehicles for cash investors wishing to diversify their portfolios away from conventional stocks, bonds, and shares. While it is well recognized for its DST services. Here is a list of some of the income funds that Perch Wealth currently offers:

Essential Income Fund for ExchangeRight

A REIT with 254 recognized single-tenant, net-leased properties spread throughout 196 markets and 29 states is called the ExchangeRight Essential Income Fund. Investment-grade and generally recession-resistant tenants like Dollar General, Family Dollar, Walgreens, CVS Pharmacy, Tractor Supply, Hobby Lobby, and Walmart Neighborhood Market were the focus of this $531 million deal. The nature of these enterprises has historically placed them particularly positioned to weather economic uncertainties and periods of economic slump, as seen during the Great Recession and again during the COVID-19 epidemic. Although retail has usually struggled in recent years, Additionally, the portfolio aims to safeguard against inflation by offering the possibility of increasing cash flow distributions supported by long-term leases that guarantee portfolio rent increases during both the primary and option lease periods.

If funds are available, this REIT will make 100% tax-deferred distributions on a monthly basis. This is a great choice for cash investors wishing to add real estate to their portfolios while still maintaining liquidity because the investment requirement is only $25,000.

Trust for VineBrook Homes

The increased demand for single-family rental (SFR) housing is something that VineBrook Homes Trust (VHT) hopes to take advantage of. The fund aims to make investments in workforce housing with modest rents. This tactic depicts how slowly entry-level new homes are built. Less than 9% of newly built homes are currently priced at $200,000 or less. Due to this, many people now have little alternative but to rent as home ownership grows more and more out of reach. From 4,200 units in Q4 2018 to nearly 13,700 SFR homes in Q1 2021, VHT has increased the number of SFRs in its portfolio. The ownership team uses a value-add strategy to upgrade the properties' condition, luring renters prepared to pay top dollar to them. The portfolio has a stabilized occupancy rate of 98.7% and an average rent of $1,044 per house with a typical size of 1,320 square feet.

This REIT is a partnership between NexPoint, which has a multibillion dollar investment platform and extensive value-add knowledge, and VineBrook, whose operators have been managing SFRs since 2007.

VHT is a $1 billion offering with a $50,000 minimum investment for accredited investors. If funds are available, accrued dividends are expected to be made on a monthly or quarterly basis and will be tax-deferred with growth potential. For those looking to invest in a real estate product type that is in high demand, VHT may be a great choice.

Preferred Shares of Bluerock

Investors seeking to invest largely in institutional-quality Class A apartment buildings might think about buying Bluerock Series T Redeemable Preferred Stock. These are shares of the publicly traded Bluerock Residential Growth (BRG) REIT, which owns a variety of extraordinarily high-quality live-work-play apartment communities in some of the top growth markets in the country.

With a low $5,000 investment requirement, Bluerock Preferred Stocks are being offered for as little as $25 per share. If funds are available, the REIT is expected to pay dividends every month.

These redeemable preferred shares offer investors liquidity right now because BRG is a NYSE-listed REIT.

Trust for Cantor Fitzgerald Income

A publicly listed, non-traded REIT, Cantor Fitzgerald Income Trust (CF Income Trust), invests at least 80% of its funds in multifamily, office, industrial, and other income-producing commercial real estate facilities, as well as stabilized, currently income-producing real estate debt (first mortgages, subordinate mortgages and mezzanine capital).

The company concentrates on making investments in long-term, net leased properties in order to minimize ongoing capital expenditures for properties, which are covered by the tenant under the net lease structure and to protect against market cycle volatility. These leases also include rent increases in an effort to further shield the fund from possible inflation.

Additionally, the industrial buildings in the portfolio are well-positioned to profit from the rising need for facilities for e-commerce and logistics. Compared to other real estate product categories, the multifamily portfolio of the fund has strong, risk-adjusted return potential and minimal historical volatility.

The 20% of funds set aside to judiciously purchase and retain securities related to real estate to support the fund's overall investment goals further balances the diversity of CRE assets held by CF Income Trust.

The CF Income Fund has a $2,500 minimum investment requirement for Class D, Class S, or Class T shares. Class I shares demand a larger minimum investment of $1,000,000 per share. If funds are available, the fund anticipates paying distributions to investors each month. Investors looking to invest in a variety of CRE product types, including both debt and equity, will find the CF Income Trust appealing.

Are you prepared to think about investment possibilities that aim to offer higher, more reliable returns on your money? If this is the case, it may be time to think about investing in a high-yield real estate fund. Call us right away. In order to establish which mix of investments would be ideal for you depending on your unique investing objectives, we would be pleased to explore the choices with you.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure: