In 2017, business magnate Warren Buffett did something somewhat unusual for him. He put hundreds of millions of dollars into a real estate investment.
Buffett has historically been dismissive of real estate investments. He called it a “worthless investment”, in part because real estate can be expensive to maintain. Real estate also often requires “sweat ability” or the physical effort required to upgrade properties or simply prevent them from falling into disrepair.
Yet in 2017, Berkshire Hathaway Inc. (NYSE: BRK-A) invested $377 million in a real estate company and in 2020 it raised an additional 5.8 million shares.
The company in question is SHOP Capital (NYSE: STOR), a real estate investment trust (REIT) that manages more than 3,000 U.S. properties, including restaurants, manufacturing facilities, kindergartens, auto repair shops and gyms.
STORE has been on a dividend hot streak since it began sending payouts in 2014, increasing its dividend by 259% since then. It now pays a return of 5.17%, or nearly three times the average return of 1.82% offered by S&P 500 companies.
STORE achieved this phenomenal dividend series thanks to a special designation in US tax law. As a REIT, it is exempt from corporate income tax on its real estate holdings – as long as it returns at least 90% of its profits to investors in the form of dividends each year.
REITs were hit hard during the pandemic, but have since regained favor. In November 2020, billionaire investor Bruce Flatt, known as Canada’s Buffett for the more than $500 billion he successfully managed Brookfield Asset Management Inc. (NYSE: BAM) for decades, told Bloomberg that he considers REITs to be the best buys in today’s market.
In the two years since, more billionaires have become excited about REITs. Steve Schwarzman, CEO of the $41.2 billion private equity firm Blackstone Group, launched a flagship real estate fund with a goal of raising $30.3 billion. Pershing Capital’s Bill Ackman, who deftly traded around the pandemic-induced market crash and subsequent recovery to turn in $3.8 billion in profit, is now recommending REITs hedge against inflation. And Paul Tudor Jones, who predicted the 1987 stock market crash and made $100 million from it, won hundreds of thousands of shares of REITs last quarter.
The lazy way to be a host
Real estate mutual funds offer a way to make money off real estate without having to worry about its upkeep – no calls from tenants about broken air conditioning, no property taxes, and none of the sweat headaches that come with personal land ownership.
But REITs are not a panacea. The Vanguard Real Estate ETF, a fund that tracks REITs, has returned 48% since January 2012. The S&P 500, meanwhile, posted a return of 214%.
High dividend payments may be more important to some investors than capital appreciation. But at least one billionaire, Jeff Bezossidesteps the REIT craze for an even more aggressive way to play real estate.
For income investors looking to step away from the duties of real estate ownership—and forego a dividend yield to pursue capital appreciation—crowdfunding may be an answer. Benzinga has put together a Real Estate Supply Screener to help readers find and follow passive real estate opportunities here.
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