The Top 3 Advantages Of REITs For The Beginning Passive Investor

Here are the top 3 reasons why an investor could choose to start investing in REITs, especially early on in their investing journey.

1. There are 2 types of REITs, there are private and public REITs.

Public REITs are listed on the public markets and are actually stocks in a company that operates real estate. This means they are 100% liquid and have no minimum entry point. These stocks are usually heavier on the dividends than other types of stocks as well.

Because public REITs are stocks, they tend to react to the stock market - when the markets are down, public REITs tend to take a hit as well even if the properties within that REIT are doing well. This happened during covid and we found that public REITs follow the returns of the stock market more than the returns of the actual properties themselves.

Quick Notes:

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REITs are a great tool for real estate investors who are just starting out or want a bit more diversification.

Private REITs on the other hand are not investments in stock, they are investments in the real estate itself. And because of this, they are illiquid and do typically have a minimum entry point that is still much lower than other strategies. Usually a few hundred bucks to get started.

Returns for private REITs have historically outperformed public REITs by about a point or 2. Most REITs have seen high single digit returns, so they are on the lower end of the passive strategy ladder in regards to returns.

2. Very low entry point.

Public REITs typically won’t have an entry point and large private REITs may only take a few hundred bucks to get started, which is a huge difference from the $25 - $50k minimums you typically see with syndications or funds.

REITs make for a great tool to get in the game and get your money moving.

3. The diversification they offer

Compared to syndications and most funds, REITs typically have significantly more properties in the portfolio, meaning you get instant access to a very diverse portfolio. It’s not uncommon for a few hundred or low thousand dollars to get you fractional shares of dozens of properties that could even spread across multiple asset types, classes, and geographies.

Some downsides of REITs

Some considerations you may want to know about REITs before investing are:

The returns tend to be on the lower side of private real estate investments, historically.

6-9% is a comfortable range for a private REIT, which is good when you’re just getting started, but as you build more cash many will start to look at funds or syndications that have higher double digit return profiles.

Customer Service

Usually REITs are nameless and faceless to the investor. Because of their ability to have investors invest fractionally with just a few hundred dollars, they deal with massive amounts of investors and aren’t typically able to offer the level of service a fund or syndication would.

Many times there isn’t someone you can call to ask questions to and it’s likely you’ll never meet the person who is managing these investments.

Overall REITs can be a great tool but like any investment they have their pros and cons but can be a great way for a beginner to get started in commercial real estate.

You can choose from public or private REITs, both of which have very low minimums for real estate investing, and you get access to instant diversification.

This does come at the sacrifice of returns, with REITs seeing single digit returns historically and a certain level of customer service.