Leverage. That’s why not. You see, people have a tendency to believe that whatever is happening now will keep on happening forever. So when REITs launched with the promise of high “guaranteed” returns through people’s investments + leverage, they caught on like wildfire. The idea was simple, you give us your money, we’ll add a bunch of debt financing on top, and use it to buy major developments. We will then use rental income from these properties to pay you back plus a guaranteed return AND pay back our loan. Attractive right? The problem though is the debt financing part. Having a ton of it is what is called leverage. It’s what allows a group of investors who have 1 million dollars to buy a 10 million dollar investment. But what it also does it create a major expense in the form of interest payments that would cause the actual price of an investment to be much higher than expected. So when the markets are up, and everything is hunky dory, banks are happy, tenants are coming in, payments are being made and everyone is over the moon. Because everyone is making money, the REIT value goes up, because everyone will always be making money right? WRONG! Look at what just happened.
When the market turns, REITs plummet like Wiley Coyote.
That’s because everyone is nervous now. The banks want their money, Investors begin running away and what seemed like a solid investment now looks like a time bomb of leverage and interest payments. No longer a good investment now is it. (#ToldYa)
Despite everything that has happened the S&P real estate index only dipped a few points. Does this dip justify the crash that ETFs and REITs are having? Heres a tip: no. Pro-tip: HELL NO Does leverage and the fact that they cant pay back the debt justify it? You tell me.
Why the SmartCrowd Model is better.
You should have gotten it by now…. NO LEVERAGE. Though let’s take it from the top. This graph shows you the performance of the UAE property market as a whole. Despite everything, the market barely took a hit.
Why? Because the Real Estate Market is not a very liquid market, that means when the market goes up it rises slowly but more importantly when the market goes down, the real estate sector is the last to react. When you invest in SmartCrowd, you are investing in an actual physical property. Not a fund. That distinction is all what matters. You and your fellow investors put up 500,000 AED, you buy a property for 500,000 AED. Thats it. No leverage. That means you are beholden to no one, you decide when to sell and when to hold. Another direct benefit is that as long as you are holding the property you are earning cash income from rent the entire time. Now the downside to this is that this type of investment should go into your safe investment portfolio not your high growth one. It is low risk, and decent reward. You should always diversify to improve your returns while minimizing risk. Have you invested yet?