Real estate investment trusts (REITs) vs. real estate investing: Which fits your style?

A real estate investment trust (REIT) is a particular type of company that owns and manages an income-producing property and provides the average person an opportunity to invest in commercial property.

“For most people, owning commercial, income-producing real estate is not possible,” says Mark Stapp, executive director of the Master of Real Estate Development (MRED) program. “Real estate is unlike other assets because each property is unique, it’s not easily traded, it is costly to buy and own, and it requires specialized knowledge and skills to manage properly.”

In 1960, Congress passed a law creating a way for the average person to invest in commercial real estate. Real estate investment trusts (REITs) give the average person an opportunity to invest in commercial property as a way to recognize wealth and have a diversified personal portfolio. “The idea of a REIT is to convert real estate into an easily purchased, easily sold, and professionally managed asset in the same way we typically invest in other assets like stocks and bonds,” Stapp says.

A REIT is a particular type of company that owns and manages an income-producing property. Investors don't invest directly in the real estate. They buy shares in the company that owns the property and thus receive benefits from the properties owned by the REIT. Modeled after mutual funds, REITs provide investors of all types regular income streams, diversification, and long-term capital appreciation. REITs own all kinds of property including land, timber, apartments, industrial land, medical offices, hotels, public infrastructure, offices, retail, and more.

On Aug. 31, 2016, Equity REITs and other listed real estate companies were transferred from the financial sector of the global industry classification standard (GICS) to a new sector — the real estate sector. “This change reflects the growing importance of the real estate sector and is expected to create a larger and more diverse investor base for the REIT industry,” Stapp says.

Here are a few things to consider, according to Stapp, when looking at real estate opportunities:

Your risk tolerance

When you invest in a single real estate property, you’re subject to that individual asset’s performance. If it loses, you lose everything. A REIT is a portfolio of assets, so it can be managed to minimize loss.

Your target returns

An individual investing in a single, income-producing asset usually considers returns along a broad spectrum — from 7 to 30 percent or higher depending on the property. REIT investors may accept returns in the 4-to-5-percent range because of the quality of the property and the diversification offered by the REIT.

Your community vision

Do you want to see cities filled with only button-down office buildings or small, intimate, contextual, mixed-use developments? If you have a preference, that could influence where you put your money. “REITs are very institutional, while individual investors or small syndicates are more entrepreneurial,” Stapp says.

The Newton in Phoenix is one example of that individual-investor style. The well-known landmark restaurant was dilapidated when local developers used local investment dollars to redevelop it into multiple uses. “There’s no way a REIT would have touched that,” Stapp says. “It’s too small and idiosyncratic. REITs prefer deploying large sums at one time and investing in things that are easier to underwrite." Put another way, Stapp says REITs are like large manufacturers: “Efficient operating entities,” he calls them. “Individual investors are more like artisans. They’re able to craft more than just create.” That said, Stapp also notes that REITS have become a dominant player in the commercial real estate market. “We need both to have a vibrant local market.”

Other trends in real estate include how property development is going from transactional to transformative, and sustainable living. Read the spring 2017 W. P. Carey magazine to learn how companies are creating strong relationships with neighborhoods and how green building is both good for business and pleasure.