Whenever the economy is enduring an agitated period, as it has been recently, investors typically look for ways to broaden their portfolios. This has led to a revitalized interest in real estate investment trusts, or REITs, which offer an opportunity to invest in real estate without owning a property outright. 

In this article, we take a detailed look at the world of REITs, including the pros and cons of investing in REITs instead of alternative investment vehicles. 

What is a REIT?

 A REIT is an acronym for “real estate investment trust,” an enterprise that owns and/or manages income-producing commercial real estate. There are several varieties of REITs. Most concentrate on a particular product type (e.g., retail, hospitality, multifamily housing, senior living facilities, student housing, office, self-storage, industrial, etcetera) or geography (e.g., CRE in the Southeast vs. Midwest). 

When individuals purchase a REIT share, they buy a piece of the corporation that controls and operates the rental property—not investing in physical ‘brick and mortar’ structures. View a REIT share like purchasing an Amazon stock: when you buy a share of Amazon stock, you are taking an ownership stake in Amazon – not one of Amazon’s products for sale. The equivalent concept pertains to REITs. 

How Do REIT’s work?

REITs usually have outlined investment parameters. Then they invest in real estate that satisfies those goals. By law, REITs are obligated to pass 90% of profits to investors in dividends. 

The value of REITs can fluctuate throughout the day, similar to what you expect with traditional stocks. REITs are subject to wider swings in volitile market activity. If the stock market plummets, the REIT’s value might follow suit – even if there has been no substantial change to the REIT’s investment portfolio. 

REITs are commonly valued predicated on a few crucial measures, including expected growth in earnings per share, the anticipated total return from the stock, dividend yields comparable to separate investment alternatives, dividend payout ratios, management quality, and the underlying condition of their assets under management. 

Investing in REITs

Unlike conventional real estate, many REITs are publicly traded on the stock exchange. This provides excellent liquidity for private investors who want to preserve the flexibility to buy or sell shares. This additionally implies that the bar for investment is inexpensive; the average investor can purchase as few as one or two REIT shares – making the opening capital contribution significantly lower than one would assume when investing in real estate directly or through other means like real estate crowdfunding.

REITs registered on the major stock exchanges can be purchased directly, just as you’d buy any other stock or security. REIT shares can also be purchased within a REIT mutual fund or exchange-traded fund (ETF). 

Some REITs are privately traded. They are not listed with the SEC and are only accessible to select investors. Usually, it’s strictly institutional investors who have access to privately traded REITs. 

PROS: The Benefits of Investing in REITs

Liquidity

One advantage of investing in REITs is that shares can be bought or sold at the snap of a finger or click of a button. This is especially true with publicly-traded REITs, which account for the bulk of REITs obtainable in the securities marketplace. 

 Diversity of Assets

 A REIT has many dozen, if not hundreds or thousands, of assets under management. This umbrella position means the viability of the portfolio is not based on the success of one individual asset, as when investing directly in a single property. 

Accessibility to the Masses

 Most REITs can be purchased as economically as a trip to the supermarket. This decreases the barriers to ownership and makes REIT shares available to the masses. 

Limited Exposure

Someone who is drawn to adding real estate to their portfolio can do so by investing in a REIT with minimal exposure. The options, which include personal ownership, can carry considerably more risk than investing in a REIT. As such, obtaining REIT shares is a particularly sensible choice for risk-averse investors. 

Strength of Management

REITs are usually professionally managed by people who have decades of experience in the commercial real estate industry. Management is commonly held answerable by a board of directors. As such, REITs will often spring back quickly after recessions, given their skillful leadership and administrative experience.

 CONS: The Disadvantages of REIT Investing

Lack of Transparency

 One comedown around investing in REITs is that the individual investor commonly has very little knowledge regarding how their money will be spent. They don’t positively know the whereabouts around how the REIT will be investing in a particular property(ies). Instead, the investor is trusting the REIT, to make knowledgeable investment choices aligned with the predefined investment parameters. Moreover, it can be challenging for an investor to discern how a particular property is performing as part of the REIT’s broader portfolio or asset allocation.

Limited Control 

Unlike direct ownership of CRE, someone who invests in a REIT has minimal control (if any) in how funds will be spent. For example, an investor will have no input in whether a property is rehabilitated, refinanced, or eventually sold.

Subject to Market Fluctuations 

Just as the prices of traditional stocks fluctuate during the day, so do REIT shares. REITs are subject to market vacillations, much more so than the value of an individual commercial property. The value of individual assets usually does not have a strong relationship with stock market performance, whereas REITs do – at least to some degree. 

Is REIT Investing Right for You? 

Attempting to select whether to invest in a REIT or alternative commercial real estate vehicle? There is no right or wrong answer; as you’ve seen above, there are pros and cons concerning REIT investing.

That said, those who are risk-averse and seeking to protect liquidity will undoubtedly want to consider investing in a REIT. How much an individual wants to spend will also influence their decision, as investing in a REIT has a relatively low entry barrier. 

Final Thoughts

Commercial real estate, once deemed an alternative investment, is growing more mainstream. Opportunities that were once only accessible to institutional investors and other high-net-worth individuals are now advancing their way to the masses thanks in part to REITs. We foresee this trend to continue as more people look for ways to broaden their investment portfolios. 

We suggest consulting with your CPA, lawyer, and/or financial advisor before investing in REITs, private equity real estate, or commercial real estate of any kind.