Location, Location, Location - Historical Look at Real Estate as Investment

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Investment in office buildings and apartment houses usually involves such large sums of money that it is beyond the power of most small investors. Therefore, in recent years, it has become increasingly popular for small investors to turn to real estate syndicates. This historical piece offers some great insight into investing in the 1960s.

A syndicate is a limited partnership organized to purchase and operate a parcel of real estate. Partnership shares are usually available in comparatively small amounts, anywhere from $1,000 to $10,000.

The properties can be any real estate holdings such as hotels, office buildings, shopping centers, terminals, or industrial parks. The prime incentive of a syndicate for small investors is the relatively high rate of income return coupled with a reasonable safety of principal.

The fact that most syndicate properties are heavily mortgaged imparts a high degree of leverage to participants. The leverage factor, or margin buying in realty investment, means that investors can buy large parcels of properties for minimum cash outlays. Moreover, most syndicate operations afford important tax advantages to investors because of their partially tax-free nature.

Now, something new looms on the horizon: the real estate investment trust. In the view of many, it will add millions of investors to those who already have an equity, however tiny, in income-bearing property.

The real estate investment trust is a sort of realty-owning mutual fund. Barrorn’s calls it the "hottest prospect" in the trade. For one thing, the Real Estate Investment Trust Act has placed real estate investment organizations on the same tax footing as regulated investment companies.

The Act exempts from federal income tax all real estate trusts, which distribute at least 90 percent of their net income to stockholders, with at least 75 percent of their income coming from real estate.

The makers of this new real estate law seemed to have meant only to protect small investors from double taxation involved in corporate ownership. However, operators o£ hotel chains have seen the law as an opportunity to improve their financial structures.

This enthusiasm on the part o£ realty-holding hotel chains and railroads to profit from the new law, however, has been dampened by reports that the Department of Treasury opposed any such action, presumably on the ground that congressional debates prior to the passage o£ the new law had made no mention of relief of large corporations operating in the real estate field.

However, realty firms such as the former syndicator groups are generally believed to qualify for reorganization into real estate investment trusts. The $1.5 billion-a-year realty syndication is expected to be swelled by many newcomers sensing an even wider market for real estate investment.

Of course, the new law places important limits on the operation of such trusts, particularly provisions requiring the distribution of 90 percent of the profits to investors. Here are a few of those restrictions:

1.A real estate investment trust may not actively engage in business.

2.A real estate investment trust may not directly render services to tenants or manage or operate property.

3.Such a trust may not deal in real estate as a business. It must hold property and/or mortgages for investment only.

4.Less than 30 percent of its gross income may come from a capital gain on real estate held for less than four years.

5.The organizer of a trust who proposes being the manager may not own over 35 percent of the shares or voting control of the trust.

6.The trust may be managed by one or more trustees and have at least 100 shareholders. No five of these shareholders can own more than 50 percent of its shares.

Interested in investing in real estate trusts? The laws have changed, but the opportunity may still be there for the savvy investor.

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