RealtyShares v. REITs

One question we get asked quite often is how RealtyShares differs from a REIT which stands for Real Estate Investment Trust (often referred to as “real estate stock”). At RealtyShares we give our investors direct access to real estate investments whereas the idea behind a REIT is that you have exposure to real estate without actually owning, directly, the property.

What is a REIT?

A REIT is essentially a corporation that owns and manages a portfolio of income-producing real estate properties such as apartments, hotels, malls and office buildings (Equity REIT’s or EREITs), mortgages secured by such real estate (Mortgage REITs or MREITs) or a combination of the two (Hybrid REITs).

REIT’s can also be private or public.Private REIT’s are not registered or traded with the Securities and Exchange Commission (SEC) and raise equity from accredited investors (i.e. individuals, trusts or other entities) whereas publicly traded REITs are registered with the SEC and traded in major stock exchanges such as the NYSE, NASDAQ and AMEX.There are approximately 800 private REITs and 200 publicly traded REITs in the United States with total assets of $400 billion.Accordingly, REITs make up only a fraction of the $11-12 Trillion Dollar US Commercial Real Estate Market.

How REITs Compare to What We are doing at RealtyShares

RealtyShares and REITs are similar in a lot of ways.Both options offer investors balance and diversification from the traditional stock and bond markets as well as value from both the current income produced from rents as well as long term appreciation of the underlying real estate asset.Both investment options also permit investors to pool their capital with other investors and thus offer a less capital intensive way to invest in a wider range of real estate.

Finally, as with a RealtyShares investment, when you invest in a REIT, you do so passively and thus you don’t have to worry about the day-to-day operations and management of the asset which instead is handled by reputable management team.

Important Differences

The main difference between a RealtyShares Investment and a REIT investment is that with RealtyShares you are investing directly into tangible commercial real estate whereas with a REIT you are investing in a corporation that in turn invests your money into real estate.In fact up to 25% of a REIT’s total investments can be in assets other than real estate. Accordingly, RealtyShares offers investors more control and transparency than a REIT since investors have the ability to personally select each pre-vetted investment opportunity.

Some additional notable benefits of RealtyShares v. REITs include:

  1. Higher Leverage & Higher Returns: Direct property ownership benefits from the power of leverage (up to 80%) whereas REITs are generally leveraged at or less than 50%. Higher leverage means higher potential returns (because you can buy more property with less equity).
  2. Less Volatility: Although touted as an effective way to diversify a stock portfolio, the performance of REIT shares have closely tracked overall equity market performance resulting in correlation coefficients as high as 0.86 (as early as 2011). This means that publicly traded REIT’s are moving in near lockstep with the market at large and are subject to the same volatility. During the same period, the comparable equity market correlation for private real estate has been close to 0.14 (ranging from -0.03 and +0.25; a very low correlation).
  3. More Transparency and Control: When you invest directly into a real estate asset, you know exactly what you are getting and thus the process is transparent and you maintain a certain level of control. On the other hand, when you invest in a REIT you are buying into a corporation that owns a pool of properties and you may not know exactly where your investment dollars are going.

Until recently, and because of the typical minimum investment thresholds for most private real estate deals, REITs have been the only viable option for investors wanting to diversify their portfolio by investing in real estate. RealtyShares is changing that by providing our investors with direct access to pre-vetted real estate investments with lower investment minimums (currently as low as $1,000+). Thus RealtyShares for the first time gives investors the true ability to achieve a mixed-asset investment portfolio.