November 6, 2019
In a world where diversification is king, more and more investors are looking towards real estate as an alternative asset to add to or replace the traditional stocks and bonds portfolio. However, without a large capital base, many can’t afford to buy brick and mortar properties.
If you’re unable to or simply don’t want to own a concrete asset, you can still get solid exposure to the industry through a real estate investment trust (REIT).
A REIT is a company that owns, leases, and sometimes operates cash flowing properties. They pass on a large portion of the income earned from their properties to investors. Different REITs give investors exposure to different real estate industries (e.g. commercial buildings, office blocks, senior living homes, hotels, etc). DiversyFund’s Growth REIT focuses on cash-flowing apartment buildings.
One of the most appealing characteristics of a REIT is that they’re required by law to pass on at least 90% of taxable income as dividends to shareholders.
There are three main types:
These are accessible by accredited investors only, ie. those with a net worth of over $1 million or those who’ve made over $200,000 for the last two years. Private REITs are not registered with the SEC nor are they regulated by them so there’s little to no public information available.
Investors are typically very experienced and have a strong, private network of connections who are sending them these exclusive opportunities.
Liquidity and historical performance will vary widely on a company by company basis but a 2014 report by industry research leader Green Street Advisors, found private REITs underperformed publicly-traded REITs by almost 4 percentage points per year.
Private REITs will differ in their investment prospectuses and the lack of public data available means there’s no general rule of thumb when it comes to private REITs.
Unlike private REITs, publicly-traded REITs are very transparent and accessible. They’re registered and regulated by the SEC and their shares trade on stock exchanges where they can be bought and sold just like shares of any public company.
The high liquidity and low barrier to entry is a big draw for many as you can start a portfolio with as little as one share and trades can be actioned in seconds.
But this great liquidity also comes with a downside. In times of market panic, all stocks are vulnerable to sell-offs and so any stock holdings, including those of your REIT, can experience violent and irrational capital depreciation. Even if on an individual basis the fundamentals remain static and you’re not spooked, emotion-driven selling will still take prices down across the board. As the algorithms, larger firms, and brokers offload positions and de-risk, your publicly traded REIT holdings can follow them down and leave you underwater.
Like publicly-traded REITs, public non-traded REITs are also registered and regulated by the SEC and offer reassuring levels of transparency. Investors can access via a secondary market. This might mean less liquidity than publicly-traded REITs but on the flip side, it also means an extra level of protection from broader selloffs in equity markets.
When the market is crashing, scared and emotional investors are unable to dump all of their positions at the click of a mouse– and this is a good thing! Time and time again studies have confirmed that humans are not good at timing the market.
This protection from broader market volatility means public non-traded REITs offer a very attractive beta to long-term investors compared to publicly-traded REITs (a lower beta equals less volatility).
Compared to equities, public non-traded REITs are highly competitive on a simple returns basis. For example, DiversyFund boasts a historical average annualized return of 17.6%. Investors in public non-traded REIT remain largely immune from typical risk factors such as currency fluctuations, interest rates, and political volatility which can otherwise drag down stocks across the board.
Because executives are not distracted by daily price changes, they can focus on achieving longer-term objectives. Another attractive selling point is that commissions and management fees tend to be very low or even non-existent and investors can get started with as little as $500.
Every investor will have different goals, timelines, and appetites for risk. Some will want quick access to their funds and so favor public REITs. Others with a strong network of industry connections and a large capital base might lean towards a private REIT.
For those investors looking to build long-term wealth while still being insulated from market volatility and protected from other people’s panics, public non-traded REITs offer a very low barrier to entry considering the benefits on offer. Its lack of liquidity can be considered its biggest strength.
Public non-traded REITs are very favorable for passive, hands-off investors while still offering the reassurance of being regulated by the SEC. With a public non-traded REIT you’re getting the best of both worlds.
DiversyFund offers investors access to invest in our public non-traded REIT. The fund is open to all investors– meaning you don’t need industry connections or to be an accredited investor to participate. Being an illiquid investment allows the fund to improve long-term returns and achieve its full potential. Learn more and get started here.