Investing in a Real Estate Investment Trust (REIT) is a popular way to “diversify” into real estate. However when you invest in a REIT you do not actually own real estate, you own a share of stock in a company.
Here are 5 reasons you can do better with direct ownership...
- High Fees - A private REIT can charge up to 17% up front before your investment even touches the real estate. A recent REIT prospectus disclosed the following fees - sales commissions=6.5%, dealer manager fee=3.5%, organization and offering expenses=2.42%, acquisition fees=1.75% and acquisition expenses=0.96%!!! For every $100 you invested, less than $85 actually went towards the real estate! Additionally, a REIT is only required to distribute 90% of the income generated by its properties back to investors, significantly lowering overall returns.
- Lower Average Returns - The average publicly traded REIT dividend is 3.4%, significantly lower than average returns from direct commercial real estate ownership. Many individual properties can distribute an annual cash return of 8% or more.
- Volatility - 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.
- Lack of Control - The REIT structure is designed to provide an investment similar to what mutual funds provide for stock investing. Although there is a diversity of assets, there is also a lack of control over which assets are being purchased. Just as many investors have control of investing in individual stocks on platforms like E*TRADE and Scottrade, they now have similar control over their commercial real estate portfolio through RealCrowd.
- Less Transparency - Although REITs have strict reporting guidelines, most investors know very little about the properties in a REIT portfolio. Direct real estate ownership increases the overall transparency of the investments.
If your primary objective is to participate in the numerous benefits that real estate has to offer discussed above, then a REIT does not achieve many of those goals.*If you like this post, be sure to enroll in our free six week course on the fundamentals of commercial real estate investing — Enroll Now.*