Are Real Estate Investment Trusts The Best Way to Invest in Property?


reitIn the August 25 article, “Are Bonds and Commercial Real Estate The Perfect Mix?” I shared a RealCrowd.com chart showing that during the 20-year period ending 2013, a combination of corporate bonds and so-called “core” commercial real estate produced similar returns to stocks with much less volatility.  “Core” refers to the most conservative type of commercial real estate opportunities.  This includes properties with high occupancy (90% or more), longer-term leases, strong market fundamentals, lower levels of leverage, and few required capital improvements.

To be clear, when I refer to commercial real estate opportunities, one thing I most certainly am not referring to are REITs.  Real estate investment trusts have become quite popular in recent years, as the Fed’s easy-money policies have sent investors to all corners of the financial markets in search of yield.  From my perspective, buying the common stock of publicly-traded REITs is an inferior form of real estate investing.  If I had money I desperately needed to put to work and couldn’t find any individual commercial real estate opportunities, I would then consider REITs.  But they are clearly second in my book, especially for buy-and-hold investors with long time horizons.

Even though I would agree that liquidity is a major advantage REITs have over direct investments in commercial real estate, there are several disadvantages worth noting.

First, the average dividend yield of a publicly-traded REIT simply doesn’t cut it.  If you are an accredited investor, the opportunities you will come across on the various crowdfunding real estate sites routinely have cash-on-cash returns of two to three times the typical dividend yield of a publicly-traded REIT.

Second, when investing in a REIT, you have no control over the properties that particular REIT purchases.  Regular readers of my commentaries know I am a fan of investing in individual bonds.  The same is true of commercial real estate.  If you are a sophisticated enough investor to pick individual stocks to purchase (so many people are), then you most likely have the capacity to learn how to select individual bonds and individual commercial real estate opportunities as well.

Third, while you may value the liquidity provided by publicly-traded REITs, those REITs also have higher levels of volatility than do privately-held commercial real estate properties.  Volatility can cause investors to make ill-advised decisions.  If someone watches his or her real estate investments fluctuate in price, the way publicly-traded REITs often fluctuate in price, I would venture to guess that person’s odds of letting his or her emotions drive the investment decision-making process increase dramatically.

If you are an accredited investor who is able to properly manage your liquidity needs, then the higher-yielding, less volatile commercial real estate opportunities found on crowdfunding sites such as RealCrowd.com or Fundrise.com might be worth a look.  In a yield-starved world, it’s worth learning about all the income opportunities available to you.

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