Most 401ks have a REIT in their mix, and many investment professionals recommend some portion of your portfolio be placed into a REIT for diversification into real estate. What most people don't understand is that when you invest in a REIT you do not actually own real estate. Instead, you own a share of stock in a company. The following article highlights some differences between REIT investing and direct ownership.
Volatility – REITs, being actual companies, have shares of stocks that are traded on a stock exchange. As such they are affected by the volatility of market shifts of the entire stock market, or more general assumptions about real estate markets as a whole. Investing in a single (or multiple) real properties doesn't face the same level of day to day volatility and in many times can be much more stable.
Commonly Lower Returns – The average REIT has a dividend that is significantly lower than average returns from direct commercial real estate ownership. The SMARTCAP Group targets properties that at stabilization can return 8% and over to our investors. Most REITs target returns in the 3-6%.
No Control – The REIT is essentially a mutual fund of multiple properties held by a single company. They can provided diversity of assets, but with that diversity comes a complete lack of control over which assets are being purchased, held or sold. There is no tangible way to touch the properties you own in a REIT – you have no choice in what is purchased and sold and in many cases you don't even know anything about the property.
Lack of Transparency – Investors know very little about the properties in a REIT portfolio, the business structure, the operations and the story behind each property. Direct real estate ownership increases the overall transparency of the investments. The SMARTCAP Group provides complete transparency about each property including quarterly newsletters, financial operations, big decisions, etc.
Investing in a REIT provides diversification and should be considered as part of an overall portfolio. However, for better returns, more transparency and more concentrated focus the benefits of direct ownership of real estate cannot be beat.