Filbrandt Reports
Overlooking This Hidden Gem in Your University Retirement Plan?
Volume 19, Issue 7
Executive Summary:
- The pros and cons of two common forms of real estate investments
- Why TIAA Real Estate is a unique choice for the university professional
Not all real estate investments are created equal.
Real estate as an investment class is a popular portfolio component for high net worth investors. The appeal comes from a combination of benefits including diversification, cash flows, price appreciation, and inflation protection.
Many university professionals may be interested in investing in real estate, but intimidated by the thought of managing and maintaining income properties. However, there are multiple ways to invest in real estate without these hassles.
This report will focus on TIAA Real Estate and highlight five key advantages when compared with two popular options, private real estate funds and Real Estate Investment Trusts (REITs).
Offered by life insurance company TIAA, this investment choice is available to many university professionals within their university benefits plans and it stands out as one of the most unique options available in real estate investing.
TIAA Real Estate Provides…
1) Direct ownership of real estate.
This is a huge advantage because real estate values are determined independent of the stock market, but the long-term returns of these two investment types should be very similar. Additionally, the value of a long-term real estate investment has historically outpaced the rate of inflation.
It’s rare for such an easily accessible investment to offer direct ownership of the underlying real estate. Private real estate funds offer direct ownership, but only accredited investors can participate, and the investment is illiquid.
2) Diversification from stock & bond markets.
One could argue this is the primary reason investors will choose to add a real estate investment to their portfolio. However, the most common form of real estate investing among university professionals —a Real Estate Investment Trust, or REIT— does not offer as much diversification as direct ownership.
A REIT owns or finances income-producing real estate and offers investors the opportunity to buy “shares” of the trust, much like one would buy shares of a company in the form of stock. As such, the performance of this investment is very closely tied to the stock market.
Because TIAA Real Estate provides direct ownership of the underlying real estate, it offers a higher level of diversification than a REIT.
3) Liquidity on a daily basis.
You can freely move assets into and out of TIAA Real Estate. Liquidity in a direct-ownership real estate investment is almost unheard of. Typically assets will be tied up for years, and the investor may experience difficulty selling the investment.
To provide liquidity, TIAA Real Estate keeps approximately 20% of the assets in short-term, liquid investments. These short-term investments can also serve to reduce volatility.
4) Accessibility to all investors.
Unlike a private real estate fund where there are barriers to entry like required minimums for investments, assets, and household income, almost any university professional with a TIAA account can buy TIAA Real Estate.
TIAA Real Estate is typically a fund choice offered in the investment lineup of university retirement plans.
5) Reduced volatility compared to a REIT.
Direct ownership is less volatile, because the real estate market tends to move more gradually than the stock market.
Additionally, the managers of TIAA Real Estate keep debt limited to around 15% of property values. This management style will tend to lead to enhanced price stability and enables the portfolio to avoid selling properties when the real estate market is depressed.
The net result is a product that has historically generated 5-6% returns with about one-quarter of the risk of REITS – ideal for many individuals approaching or in retirement.
Additional Considerations
Investment choices should be made after careful consideration of all available options. Working with an independent adviser who is required to put your interests above their own can help you ensure your portfolio aligns with both your short and long-term financial goals.
The information presented in this report is for educational purposes only and does not constitute legal or financial advice, nor is it a recommendation of any investment or strategy discussed herein. Consult with an attorney or tax professional regarding your specific tax or legal situation.
Related Articles
- To learn more about our investment process, read this report: The 3 Hidden Risks of Consolidating Your Retirement Accounts
- To learn more about the importance of seeking an independent fiduciary, read this report: Who Can You Really Trust With Your Financial Future?
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