A REIT is an easy way to get into investing in real estate, but it lacks some of the key benefits of commercial real estate ownership that have led Gray Capital to invest in multifamily real estate via the private syndication model.
What is a REIT?
A REIT is a Real Estate Investment Trust. As a fiduciary trust, a REIT is defined by the relationship between its assets and its trustees (investors). Investors in a REIT do not own the assets. They own a part of the REIT. REITs are much more like owning shares of stock in a public company in this case, only instead of selling computers or software-as-a-service, it buys and sells real estate.
REITs were created by the IRS in 1960 to make it easier for the public to invest in companies whose primary purpose is to buy, hold, and sell real estate assets.
Most REITs invest capital in the form of equity into commercial real estate, others invest in real estate mortgages while others utilize a hybrid strategy of both debt and equity. Some REITs specialize in a particular asset class, strategy or market, while others are more diversified or agnostic. By charter, REITs must distribute 90% of their earnings to shareholders in the form of dividends. These dividends are taxed as ordinary income and do not pass on any tax benefits such as depreciation.
Advantages of REITs
- Liquidity: You can buy and sell shares of a REIT as easily as you can stocks.
- Diversification: Your investment is spread across multiple assets.
- Low barriers to entry: Typically, you would not need to be an accredited investor to purchase a share of a REIT, and investing in a REIT typically requires less money up-front.
Investing in a REIT is an attractive and accessible opportunity for investors interested in commercial real estate. It costs relatively little to buy a single share of a REIT, and investors can easily sell their share(s) when they feel it is appropriate. Additionally, investments in a REIT take advantage of the underlying benefits of the housing market, which has held steady during this current economic downturn and has the potential for significant growth in the coming years. Investment in a REIT also provides a level of diversification, with your returns tied to entire portfolio of properties, which can benefit those looking for a lower-risk real estate investment.
Disadvantages of REITs
- Over-Diversification: You have little to no choice over specific assets for your investment, and instead your investment is tied to the collective success or failure of all the properties owned by a REIT. You may get the “beta” of the real estate market, but miss out on making targeted strategic investments that can yield outsized returns, or alpha.
- Volatility: Most REITs are publicly traded and experience the same value price volatility as other paper assets such as stocks.
- Little to No Tax Benefits: Tax benefits such as depreciation are not passed on to investors of REITS.
- Indirect Investment: You are not investing in a real estate property. You are investing in a company.
Many of the drawbacks to investment in a REIT are inherently linked to the structural relationship between investor and assets. As noted above, investors neither invest nor have ownership in a distinct asset or property when they invest in a REIT. Investing in a REIT means owning a share of the entire organization. More likely than not, the average returns on the total assets held by a REIT will not be as high as the returns on a single well-performing property. If you know that a REIT is acquiring a property that you believe will have enormous potential, that upside will be diluted among all of the properties owned by that REIT. This is one of the central drawbacks of owning a share in a REIT: You have less choice over what and where you invest.
Advantages of Investing with Gray Capital
- Greater Choice: You can choose exactly where you would like your investment to go, tailoring an individualized portfolio of real estate assets.
- Tax Benefits: Gray Capital investors share in the full tax benefits associated with owning real estate such as depreciation, interest write off, loss carry forward and more. (Consult your own financial and tax advisor)
- More Information and Transparency: Our team will provide you with a wealth of detailed, on-the-ground information about each and every property that you choose to invest in.
- Expertise and Guidance: Our multifamily real estate investment experts have building a successful portfolio of assets, and we extend to our investors the same knowledge and experience that has led to our great track record.
An investment with Gray Capital may entail a longer hold period, a larger initial investment, and slightly more barriers to entry than a REIT. With all of these barriers, why not choose the easy route? Why have investors chosen to join Gray Capital and commit their money to our investment thesis, when REITs seem to have all of these convenient advantages?
The answer, largely, is ownership, choice and the successful track record of Gray Capital and the strategy that drives the firm’s investment decisions . The diversification inherent to REITs means that you are unable to make the kinds of specific investment decisions that you can make with Gray Capital. You do not control where your money is being invested. With Gray Capital, you can pick the exact asset that you would like to invest in, and your investment and returns are directly tied to that property. Your investment is ownership in a way that is fundamentally different from the paper structure of a REIT.
This choice can grant investors the ability to find a specific property that has a much higher potential for success than the diluted average returns of a REIT spread across many different properties, but the key here is information and expertise. Multifamily investment is a serious commitment with enormous potential for success, which means that it is imperative that you receive as much of the information and guidance as you can so that you can make the correct choice. At Gray Capital, we not only provide investors with a wealth of valuable information, we also are personally available with our own guidance so that investors make a fully informed decision. Additionally investors who join us will make an investment with Gray Capital. These are properties that we have confidence in, that we stake our track record on, and that we choose to invest with as well.
We invite you to join in our success.