It’s a sound question: Shouldn’t I just buy REIT shares to participate in real estate investing?

The answer is: It depends on what your primary investment objective is.  

Investing in a Real Estate Investment Trust (REIT) simply means that you own shares of stock in a company that derives its income primarily from owning real estate investments. Given that REIT shares are stocks traded in the stock exchange, they are subject to the high volatility and market shifts of the stock market as a whole.

I like to use the large REIT General Growth Properties (NYSE: GGP) as a case study…

In March of 2007, GGP approached its highest price at $67 per share through a very strong real estate and stock market. Within two years GGP stock was trading less than a dollar (GGP reached a low of 41 cents by November 2008). Now that’s market volatility!

As a REIT, GGP is required to obtain regular appraisals of the value of it’s underlying real estate holdings from national firms. During that same period of time, GGP maintained strong valuations of its underlying real estate, demonstrating the lower volatility and higher security real estate has to offer when compared to stocks. Although GGP had billions of dollars of real estate and was cash-flowing from its assets, its stock price was completely at the whim of the stock market.

I’ve charted the data between the stock price and the underlying real estate value at the end of each year below. Take a look:

REIT vs Real Estate

Investors also give up nearly complete control of their investment decisions within the REIT. I worked with some of the largest REITs in the country and although most of the time their investment strategy was sound, there were times where some decisions were driven not by the quality of the real estate, but simply because an asset achieved some sort of short term benchmark despite potentially having long term drawbacks.

If your primary objective is to participate in the numerous benefits that real estate has to offer, then a REIT does not achieve many of those goals.

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