Anwar: Hey everyone, thank you so much for joining here on the Noyack Wealth Weekly. This week our topic is on REIT which is Real Estate Investment Trust. We’re pleased to have a special guest over here Daniel Dorfman who is the co-founder of Invest with Roots, which is a REIT platform making great headway. What inspired you to create a platform for the REIT space and why do you think it’s a good investment vehicle for younger generations?
Daniel Dorfman: Thanks for having me on the show. It’s interesting because the reason we did start this platform is for the younger generations. It stems from I spent my entire career investing in real estate, was fortunate enough to have that opportunity to be able to get in at times where you could afford to buy your first house and then could afford to get into other real estate investment vehicles and stuff like that. Roots was born out of despair at looking at the gap between renting and owning really and understanding that year after year we’ve been helping to not decrease that gap. Honestly, I was helping people who were already ultra wealthy to go buy other properties or maybe buy their first home or whatever it might be and there’s this huge swath of people who are not getting to participate in real estate at all. They’re renting, they’re not getting to be a part of one of the biggest wealth creation vehicles out there, and so our aim was to say we want to create a community where anybody can invest and participate and learn what it feels like to build wealth through real estate in a way that felt authentic and felt real and not just like a watered down public REIT. So yeah, that’s our mission – our mission was to bring accessibility and participation to anyone across the United States.
Anwar: For young investors who may not be familiar with the real estate investing space, can you break down what a REIT is and how it works?
Daniel Dorfman: So a REIT is, as you mentioned, a real estate investment trust. The best way to describe it is similar to kind of an ETF or portfolio investment in the stock market. Basically what you’re doing is you’re investing and when you invest in a REIT you’re becoming a limited partner in that company and that company goes out and buys properties, manages those properties, sells those properties, potentially lends on property. But the unique thing about a REIT is that for investor protection sake there’s very strict rules in terms of what you can participate in and what you can’t so that you understand as an investor when you put your money in a REIT that you know 90% of the income made at that REIT is going to be on real estate activities, that you know 90% of distributions are going out to the limited partners at the end of the year. There’s a lot of amazing rules and kind of restrictions around what classifies you to be a REIT that makes it a really protected investment for your retail investor, your average investor.
The other thing that’s unique about it is the structure does have some tax benefits from the distribution side of things. Your distributions when you’re invested in a REIT are classified as REIT income versus ordinary income which usually has about a 20% discount to ordinary income. Really unique component there as well and I think it’s just a great spot to start. If you’re looking at trying to figure out what to do with your capital and you’ve got it diversified across equities and different kind of components, REIT’s a great position to bring into your portfolio that gives you real estate exposure. There’s tons of versions out there – REITs all about residential, there’s ones that are just about warehouses, there’s ones that are just about short-term lending. It’s really a great product for understanding that the managers who are doing it are strictly monitored and there’s only certain things that they can do with your capital. That’s one of the reasons we chose it is we wanted that oversight, we wanted people to understand that we’re taking their money very seriously and we’re going the extra step of becoming a REIT and not just a fund.
Anwar: In terms of investing, how do you compare a REIT to other popular investment options like maybe stocks or crypto or even ETFs?
Daniel Dorfman: Everything’s got its place and you have to understand your investing strategy to know how much of a percentage you want put in each bucket. For me what I love about kind of the structure that we have at the REIT you can get two things – your distribution which is your cash component which is always great. You can take that, you’re always going to get that cash component and save for future passive income if you wanted to and you’re also typically going to be included in the appreciation of those assets. It’s the better dividend paying stocks – you’re still going to get the growth of the stock and you get the dividend cash outlay. The difference is you’re not relying on IBM’s boardroom to decide if they’re going to give you a distribution because of X, you’re going to get the distribution of profit so it’s mandated. So if you’re looking for passive income in the future, a REIT is a great place to start stacking cash now and then over time that’ll grow and you’ll be able to get that passive income that everybody always wants later in life.
Anwar: What trends are you seeing in the real estate space that younger investors should be excited about and how can they benefit from them?
Daniel Dorfman: I don’t know if this is exactly the answer to that question but right now the trend, for the first time in my career, and it’s been trending this way but really right now, this is the first time that I’m advising people who I’m close with that a REIT investment or an investment in this type of alternative real estate fund product is actually going to be a better invest than buying your first home. I would never have told you that five years ago. The reason behind that in my thought process now is there are changes happening fundamentally in property taxes, in insurance, our rate environment and the inflation of maintenance and repairs that are really outweighing – the cons are starting to outweigh the pros in terms of owning your single unit.
When you get to scale at a level and you can pay and buy and understand the mechanisms those operational efficiencies do get you a great return and still can produce that same value, but five years ago I would have told you go buy your first house no matter what. Now the scale is tipped the other way in my opinion where it’s more consistent for you to continue renting even if your rent goes up 5% and put the rest of the money that you were thinking about saving for a house into a really good REIT. Get the exposure to real estate without the headaches of having to worry about if your property taxes are going to go up or if you’ve got an insurance claim and now can’t find insurance which is happening to people all across the Southeast right now in Florida and I’m sure in North Carolina. It’s the first in my career where I’m telling people that it’s smarter to invest in a portfolio investment than to be able to purchase a house even if you can.
Anwar: Absolutely, I mean another thing to add is probably the high mortgage rates that we have over here – six percent, six and a half, seven percent. I don’t think especially when you’re starting off fresh life at 27, 28 years old that’s just going to massively hinder your financial success in a long run. What are some myths about real estate investing that you’d like to clear up for the young investors like myself where we have no exposure to real estate investing and most of our investing has been strictly on stocks or bonds or ETFs or crypto?
Daniel Dorfman: I don’t know that there’s a big myth to it but I think what we see – so our fund is available to anybody across the country for as little as $100 and has a very like Robinhood and Acorns type model in terms of how you can participate. What we see a lot of in the younger generation who are in that crypto mindset is they’re expecting daily returns and monthly returns and that’s not real estate. So don’t go into any real estate investment including ours if you don’t want to be in it for at least a year – to me really five. You need to think about when you invest in a REIT as if you are investing in a property. Give it the time to season, understand that that investment’s not something you’re selling next year. You don’t go buy a property and expect to sell it next year unless you’re flipping it and that’s a different world, but REITs are not a flip investment. REITs are a consistent long-term investment that can pay huge dividends at the end but don’t go into it thinking you’re going to ride the wave and sell in a few months. That’s kind of my advice and just for what it’s worth also, public REITs are tough too because those move based on market perception and not on actual assets in the REIT, so seeing those go up and down daily that’s a strange thing in real estate.
Anwar: One other question for you, I think the last question I have for you is what advice would you give someone who’s just starting to think about real estate investing but feels really intimidated with the market conditions or the geopolitical issues or just the political issues in the nation?
Daniel Dorfman: What I’ll say is historically real estate’s been a phenomenal investment, it’s always kind of self-corrected and gone up, so go ahead and get in and participate. I think even today it’s probably the shakiest real estate outlook’s been a long time because of the commercial stuff, the office space, the other things that are happening, high rates, all things we’ve mentioned on this call. I still believe in real estate, they’re not making more of it, we have a lot of demand across this country and just get in, participate, have that exposure because it’s portrayed as the American dream.
Anwar: Thank you so much for your time Daniel, a pleasure having you on this show.
Daniel Dorfman: Alright, thanks for having me.
