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Rhea was scared stiff, her heart beating fast. Even though she was a mythical Greek Titan, she was terrified of what might happen if her husband found out she’d left their baby on the isle of Crete. Still, she stepped closer and held it together as much as she could.
“Is all prepared, as usual?” asked her husband Cronus. He stretched his jaw in anticipation.
“Yes, my love,” Rhea responded. “Baby Zeus is ready for his father.” She gave the wrapped child to her husband.
“Excellent,” Cronus said. And with that, he lifted up his baby Zeus and swallowed him whole. Or so he thought.
The story of the Titan father of the Greek god Zeus was complicated to say the least. In Greek mythology, he was the last of twelve children and the only child willing to defend his mother from an abusive father. He defeats and exiles his father and rallies and frees all his siblings to create a new world of Titans (the Old Gods), and they gladly accept him as king.
But there was a legend that one day, in return for him usurping his father, his child would do the same to him. And as he aged and became more power-hungry, he could not bear to let that happen. And so, for each of his wife’s 6 children delivered, he ate them all. He became the tyrant that he once hated and feared, and had gone mad with power, size, and anxiety.
While this story is from Greek mythology and taught in schools on the basics of Western culture, the life of Cronus mirrors the story arc of one of the newer innovations in the real estate investment game: the story of Real Estate Investment Trusts (REITs).
After World War II ended and millions of soldiers returned, the United States saw an economic boom unlike what had been seen in history. While most sectors of the economy prospered, real estate owners especially benefited from the boom and urban development. However, investing in real estate typically required a significant amount of capital and expertise that made it difficult for individual investors to participate.
To remedy this and allow more people to access real estate, President Dwight Eisenhower signed the Real Estate Investment Trust (REIT) Act in 1960 to allow smaller investors the opportunity to pool and invest their capital in large-scale, income-producing real estate assets. To qualify for the REIT designation, they are required to invest at least 75% of their assets in real estate and pay out at least 90% of their taxable income as dividends to investors.
Over time, generalist REITs specialized into niches that provided investors more specific types of real estate to invest in. Investors can choose from an equity REIT (which focuses on owning income-generating properties and earning rental income from them) or a mortgage REIT, which provides mortgages that have an interest payment (similar to a mortgage on a house). Many REITs also specialize in certain real estate types, such as apartments, healthcare facilities, senior living homes, office buildings, and malls.
Thus, much like Cronus’ early life, REITs were initially the story of the underdog that democratized access to wealth for those who were held back and brought more fairness to a challenging landscape.
However, similar to Cronus’ later life, REITs have grown massive & powerful, since their inception in 1960 and will do anything to stay in that space growing to over 200 REITs by 2023 with property valued in excess of $3 trillion dollars, just in the United States alone!
REITs come in all shapes and sizes with the large ones having so much money to invest, they typically buy the biggest assets around the country to feed their size, including downtown office buildings, malls, and computer data centers. Typically the primary option for retail investors, they consume capital from everyday people and institutional investors to funnel the money into the largest/most valuable properties in the richest areas of the U.S., which further inflates real estate prices in major cities. On the other hand, the smaller ones tend to be non traded REITS that can be fairly nimble and diverse in their approach but harder to access for investors.
Despite having stricter accounting regulations because they use everyday people’s money, REITs have grown so complex that most people may not understand what exactly they’re investing in. With tens or hundreds of large properties and tens of thousands of tenants all being bundled up together and constantly bought and sold, it is difficult for even experienced investors to understand what exactly makes up a REIT’s assets day-to-day.
Investing in REITs can offer various potential benefits to investors such as:
By investing in a REIT, investors gain access to a diversified portfolio of real estate assets across different geographic regions, property types, and tenants. This diversification can help reduce concentrated risk to one asset and volatility of the market, as real estate assets typically perform differently from other asset classes such as stocks and bonds.
Unlike direct real estate investments where the investor is responsible for managing the property, REITs have a dedicated management team that handles the day-to-day operations of the properties in the portfolio. This can be particularly beneficial for investors who lack the expertise or time to manage real estate assets themselves.
As noted, 90% of the REITs taxable income is dividends to their investors and there are various tax deductions an investor can make so to lower the amount they have to pay in taxes.
While investing in REITs has potential benefits, it's important to understand the drawbacks as well.
The legal documents and financial statements can be dense and difficult for the average investor to understand, which could lead to making uninformed investment decisions. Moreover, REITs annual reporting and public filings, may contain a lot of fine print that could sneak in fees or other unfavorable terms.
Tracking all the fees associated with investing in a REIT can be difficult, particularly if the fees are not transparent. Investors may not be fully aware of all the costs associated with investing in a particular REIT, which can eat away at their returns.
Another potential drawback is the need to trust the leadership team of the REIT. Investors are relying on the REIT's management to make sound investment decisions and to allocate capital wisely. This can be particularly challenging with private REITs, where there may be limited information available about the management team's track record and decision-making process.
Investors do not actually own the real estate assets held by the REIT, but rather a share of the portfolio. This means investors have no control over what properties the REIT buys or sells, and their returns are tied to the overall performance of the portfolio.
REITs can trade at a discount to the actual value of the underlying real estate assets. This means that investors may not be able to realize the full value of their investment if they need to sell their shares.
Overall, it's important for investors to carefully consider the potential drawbacks of investing money in any situation whether that be REITs, stocks, or even buying a car.
An additional layer to understand is that not all REITs are created the same. From fees charged, the ability to buy and sell shares, availability, and types of assets invested in, there can be very big differences between public and private REITs that are important to know.
Public REITs are publicly traded on major stock exchanges, which means that they are highly liquid and can be easily bought and sold by investors. Additionally they are often large, with portfolios that include dozens or even hundreds of properties. These portfolios are diversified across a range of property types and geographic locations, which helps to reduce risk for investors. Typically they charge management fees that are lower than those of private REITs, although they may also charge other fees such as brokerage fees or commission fees. The most common type of public REIT is an equity REIT, which invests in and manages income-producing properties such as office buildings, shopping centers, and apartments.
Private REITs are not publicly traded, and are typically harder for investors to access. As a result, they are less liquid than public REITs which makes it more difficult to buy and sell shares. Furthermore, they can vary greatly in size, from small funds with a few properties to large funds with hundreds of properties. Additionally, because private REITs are not subject to the same regulatory requirements as public REITs, they may charge higher management fees and other fees. The most common type of private REIT is a mortgage REIT, which invests in and manages mortgages on income-producing properties.
Private REITs may offer higher potential returns than public REITs, but they also come with higher risks as they are less liquid; it can be difficult to sell your shares if you need to raise cash quickly or at a value you’d want in a timely manner. Additionally, private REITs may be subject to less regulatory oversight than public REITs, which can make it more difficult to evaluate their management practices and investment strategies.
REITs attract a broad range of investors, from individual retail investors to institutional investors. Individual investors are drawn to REITs for their ability to provide a reliable income stream through dividends, as well as the potential for increased asset value. Institutional investors, such as pension funds and endowments, are attracted to REITs for their diversification benefits, potential for long-term growth, and the ability to access large-scale real estate investments that may be difficult to acquire directly given the time necessary to do it. Also, foreign investors also play a significant role in the REIT market, as they seek to gain exposure to the US real estate market.
It should be noted, however, that not all REITs are created equal, and investors should carefully evaluate each investment opportunity to determine whether it aligns with their investment objectives and risk tolerance.
Now how does this all affect you? REITs provide a way to own a fraction of large, diversified real estate portfolios, offering investors exposure to various property types without the need for substantial capital or specialized knowledge. It also doesn’t have to be a long term commitment. If publicly traded, REITs may offer you the ability to easily get in and out of your investment; so for those who want to own real estate but don’t want to make a big commitment REITs can be a first step to ownership with steady dividend payments. However, the performance of a REIT can depend heavily on the managers running it, which takes the control out of your hands, and makes it crucial for you to trust the managers as well as understand the underlying assets.
It can be fun to know you have indirect ownership in a property through REITs and enjoyable for those who like tracking stock movements, as public REITs can resemble the experience of monitoring stock performance. Investing in REITs has long been considered one of the easier options for individuals looking to embark on their ownership journey in the real estate market…UNTIL NOW.
In the end, REITs are like Cronus. They started off for a good purpose and are a big improvement on top of what existed before. But as they get large, and concerned about their own survival (management inside focused on their salaries and bonuses) they take away choice and grow because of the public dollars. They definitely have a place in the real estate investment landscape and many are well run, but not quite the final evolution of RE investment. Cronus meets his end at the hands of the 6th child he thought he’d swallowed, named Zeus.
Once upon a time, there was an ant and a grasshopper who lived in a beautiful meadow. The ant was a hardworking creature, always busy collecting food and storing it for the winter. The grasshopper, on the other hand, was carefree and loved to sing and dance all day long.
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