Bill Chen, Managing Director at Rhizome Partners, shares his thoughts on why publicly traded REITs are an attractive opportunity. They discuss the potential of investing in multifamily REITs for higher yields and inflation protection. The podcast also explores the impact of changing demographics on the rental market and the challenges faced by smaller players in real estate investments.
REITs offer an attractive opportunity with potential returns due to low rates and favorable conditions.
REITs are particularly appealing in the multifamily sector, offering higher yields and inflation protection.
Despite the rising 10-year yield, REITs still provide appealing yields and offer inflation protection and historically strong returns.
While office space may face potential oversupply and changing demand, the multifamily REIT sector remains strong with growth and stability opportunities.
Deep dives
Opportunity in REITs
The REIT sector is currently an attractive opportunity due to low rates and favorable conditions. Rates have come down, but the REIT sector hasn't moved significantly. This is one of the best times to invest in REITs, with strong potential returns. The speaker, Bill, has extensive experience in the REIT space, and believes that the current opportunity is as good as it was in the early 2000s. Compared to other investment options like treasuries, REITs offer attractive yields, inflation protection, and the potential for future growth.
Factors Influencing REIT Investment
There are several factors influencing the attractiveness of REITs in the current market. They include the low yields on other investments like treasuries, the potential for higher yields in the REIT sector, and the inflation protection offered by real estate assets. The speaker highlights that REITs are particularly appealing in the multifamily sector, where investors can earn a higher free cash flow yield compared to treasuries and enjoy inflation protection. Furthermore, the speaker mentions that the supply of new multifamily properties is expected to decline in the coming years, adding to the investment potential.
Comparing REITs to Other Investment Options
The speaker addresses common concerns about investing in REITs compared to other investment options. The main concern is the rising 10-year yield, which makes some investors question the attractiveness of REITs. However, the speaker argues that even with higher rates, the yields offered by REITs, particularly in the multifamily sector, are still appealing. Additionally, the speaker points out that REITs have the advantage of providing inflation protection and historically strong returns. The comparison is made between the yields and investment potential of treasuries and REITs.
Understanding the Supply and Demand Dynamics
The speaker discusses the supply and demand dynamics in the REIT market, particularly in the commercial real estate sector. There is a focus on office space and how different factors can influence its attractiveness as an investment option. The speaker highlights that office space is a concern due to the potential oversupply and changing demand patterns, particularly in a post-COVID world with more remote work options. However, the overall view is that the multifamily REIT sector remains strong, with opportunities for long-term growth and stability. The focus is on the age and condition of buildings, the ability to generate cash flow, and the potential for future rental increases.
The risk of short maturity in real estate investments
One of the main reasons why real estate investors fail is due to short maturity in their investments. When investors secure bridge loans or short-term financing with maturities of less than five or ten years, they often face challenges when the market turns and they are unable to secure long-term financing. Short maturities can lead to permanent capital losses in real estate investments.
Potential pitfalls of using floating rate debt
Using floating rate debt in real estate investments can be risky. Although it may seem favorable when interest rates are low, the uncertainty and potential for interest rate increases can lead to financial challenges. Opting for fixed-rate debt offers more stability and protection against rising interest rates.
The importance of avoiding overpayment
Overpaying for real estate properties can have negative consequences, particularly when market conditions shift. Investors who buy properties at inflated prices may experience difficulties in generating profitable returns. It is essential to conduct thorough due diligence and assess the fair value of a property before making an investment.
Bill Chen, Managing Director at Rhizome Partners, stops by The Business Brew to share his thoughts on why publicly traded REITs are an attractive opportunity. Rhizome Partners is a private partnership targeting deep-value investments with a large margin of safety. In this episode Bill lays out his argument for why publicly traded REITs qualify for consideration now.
We hope you have a wonderful Thanksgiving with your family. Hopefully this provides some less controversial dinner table discussion!
As always, nothing in this show is investment advice. This show is for entertainment and educational purposes only. Please consult your financial advisor before making investment decisions. And do your own due diligence!!
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