Gypsy vs REIT
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A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate.
Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.
In general, REITs specialize in a specific real estate sector. However, diversified and specialty REITs may hold different types of properties in their portfolios, such as a REIT that consists of both office and retail properties.
Many REITs are publicly traded on major securities exchanges, and investors can buy and sell them like stocks throughout the trading session. 2 These REITs typically trade under substantial volume and are considered very liquid instruments.
Most REITs have a straightforward business model: The REIT leases space and collects rents on the properties, then distributes that income as dividends to shareholders. Mortgage REITs don't own real estate, but finance real estate, instead. These REITs earn income from the interest on their investments.
To qualify as a REIT, a company must comply with certain provisions in the Internal Revenue Code (IRC). These requirements include primarily owning income-generating real estate for the long term and distributing income to shareholders. Specifically, a company must meet the following requirements to qualify as a REIT:
Invest at least 75% of total assets in real estate, cash, or U.S. Treasuries
Derive at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales
Pay a minimum of 90% of taxable income in the form of shareholder dividends each year
Be an entity that's taxable as a corporation
Be managed by a board of directors or trustees
Have at least 100 shareholders after its first year of existence
Have no more than 50% of its shares held by five or fewer individuals
There are three types of REITs:
Equity REITs. Most REITs are equity REITs, which own and manage income-producing real estate. Revenues are generated primarily through rents (not by reselling properties).
Hybrid REITs. These REITs use the investment strategies of both equity and mortgage REITs.
Since REITs are required to distribute 90% of the rental income generated, the growth of REITs needs to be funded in different ways. The three ways are,
Undistributed cash flow
Debt
Equity
The "cheapest" money comes in the form of the undistributed cash flow. This is the amount earned but not distributed to investors and is by design (and tax law) the smallest but cheapest (free) source of capital. This amount is small and therefore makes growth slow.
The next cheapest is debt, especially in low-interest rate environments. Throught the past decade we have seen historical low interest rates on 30 year mortgages. This has since changed since the pandemic and the global economy falling. This cuts into potential growth of the REIT in interest costs.
The most expensive source of capital is equity. This makes sense intuitively because each additional share sold is a future claim on a REIT’s cash flow and increases the dividend cost.
Gypsy has many of the same properties of a REIT such as:
Invest at least 75% of total assets in real estate, cash, or U.S. Treasuries
Derive at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales
Pay a minimum of 90% of taxable income in the form of shareholder dividends each year
Be an entity that's taxable as a corporation
Be managed by a board of directors or trustees
Have at least 100 shareholders after its first year of existence
Have no more than 50% of its shares held by five or fewer individuals
The major benefits that Gypsy has over traditional REITs is thanks to the blockchain. Tokenization makes equity the cheapest way for Gypsy to grow rather then debt, unlike traditional REITs.
How Gypsy grows with the funds and houses it currently operates.
REITs are required to pay out 90% of their income to investors. Gypsy gives the investors the option to collect this payout or automatically re-invest it into newly minted shares of the REIT. These newly minted shares are non-dilutive to current investors and lead to compounding rental income increases for the investor. This maximizes the ability for growth via the distributed cash flow.
Rent to own in Gypsy enables renters to gain ownership as they rent Gypsy homes. This adds more funds to growing Gypsy without diluting current investors. This amount is greater than the undistributed cash flow would be. This maximizes the ability for growth via rent-to-own.
How Gypsy grows the number of homes it has from outside investors
The most expensive way for a REIT to grow is via equity, the selling of shares. This results in the dilution in the Earnings Per Share (EPS) for the REIT. Gypsy instead takes in new investments and mints new shares given the net asset value of the REIT, and total shares outstanding. Taking all these factors into account, Gypsy can mint new shares at a fair price that does not dilute the earnings per share for the current investors.
Mortgage REITs. Mortgage REITs lend money to real estate owners and operators either directly through mortgages and loans, or indirectly through the acquisition of . Their earnings are generated primarily by the —the spread between the interest they earn on mortgage loans and the cost of funding these loans. This model makes them potentially sensitive to interest rate increases.
