Are REITs as Good as Real Estate Investing?
Real Estate Investment Trusts (REITs) seem like a good option for busy professionals who want to invest in real estate in a passive way. They’re easy to buy and sell, have a 75-75-90 requirement, and many produce reliable dividends. But are they the same as directly buying real estate?
Here are the top reasons why we prefer to actually own real estate, compared to publicly traded REITs
1 - Can't Add Value to a REIT
As an investor in a REIT, you are along for the ride with both the market and the managers of the REIT.
You are not able to add value to your REIT investment, whereas if you’d bought a piece of real estate you would be able to add value. You have to wait for the market to recognize a higher value in your investment.
How to we add value to real estate investments?
Renovate, raise rents, reduce expenses, and reposition! We buy assets that are operating below their true potential, fix them up, and thereby raise the value.
Build, Renovate, and Add Value!
2 - REIT Investors do not get Depreciation Benefits (aka paper losses)
REIT investors can receive price appreciation and cash flow dividends, but they do not receive passive paper losses. Paper losses are one of the key benefits of real estate investing. Implemented properly, accelerated depreciation coupled with cost segregation can allow investors to place large sums of cash in their pockets, while showing losses on paper for tax reasons.
For more information about what depreciation can do for you, you must discuss with a CPA familiar with your situation. The tax code is extremely complicated and competent professionals can put far more money in your pocket than the cost of their services.
3 - REITs Have High Price Volatility
In this case we’re talking about publicly traded REITs. The market crash at the beginning of the Covid pandemic is the perfect example of the extreme price volatility of REITs.
Look up the price chart on your favorite REIT for Q1 and Q2 of 2020, and you’ll see a precipitous drop as lockdowns hit. But what happened to actual real estate values?
Underlying real estate values continued to rise steadily throughout the pandemic. REIT prices and values are driven by short term market sentiment, whereas real estate values are significantly more stable, driven by fundamentals.
Okay, okay. REITs Aren't as Volatile as Meme Stocks
4 - REITs are highly liquid
Sounds like a benefit, right? After all, liquidity is often touted as an advantage of publicly traded securities. Well, I’m here to tell you that liquidity is a disadvantage.
Liquidity enables panic selling. The reality of investor psychology is that investors panic when there are extreme price drops. As we already established, REITs have extreme volatility and therefore experience much greater price fluctuations than actual real estate.
"Be greedy when others are fearful, and fearful when others are greedy"
- Warren Buffett, Possibly the greatest investor in history
Warren Buffett is undoubtedly an exceptionally very smart man, but by his own admission his investing success is due to his mastery of investor psychology. Most stock investors fail because they follow the herd, panic, and ultimately buy high and sell low.
REITs’ liquidity means that when those 20-30% down times come, most investors panic and sell, trying to cut their losses and avoid the bottom. Real estate investors, on the other hand, rarely experience that level of price volatility in the first place. When we do come across hard times, we can’t just liquidate our whole portfolios with three clicks of a mouse. We are forced to find creative solutions and work through difficult times.
Conclusion - Real Estate Wins
We’ve outlined a few key differences between REITs and direct real estate ownership. Real Estate is the clear winner, in our opinion.
But fret not! None of this means you have to go out and buy the house down the street to become a real estate investor. Nor do you need to try to flip like the folks on HGTV.
Passive Real Estate Investing
There are many options to passively invest in real estate without buying yourself another job.
If you’d like to dive deeper into passive investing options we can offer, join our Passive Investing Club and schedule a call.
