By Warren Cassell | August 10, 2015
A number of well-experienced rental property owners make the mistake of comparing apples to oranges when they argue that a direct investment in real estate is far better than an investment in a real estate investment trust (REIT). Despite their seemingly similar characteristics, owning a REIT and owning an actual property are two completely different means of benefiting from income-producing property. Each of these options possess their own pros and cons.
For example, a person who is looking to start a business or simply play an active role in his or her own wealth creation is a lot likely to find acquiring, maintaining and renting real estate attractive. On the other hand, the average investor who is only looking to earn passive income will prefer to avoid the hassle attached to owning property by investing in REITs. Ultimately, there is no right or wrong route. It just depends on a person’s goals.
One key distinction between the two options is that individual investors that choose to do their own deals are usually limited to purchasing residential properties; however, REIT investors are given access to a wide range of property types that normally have huge barriers to entry attached to developing or acquiring them. Below are a few types of real estate that equity REITs own.
The U.S. has become a renter nation over the last decade and there is no sign of that trend changing anytime soon. This is why residential real estate is one of the most popular sectors that REITs operate in. Multi-family real estate refers to a single property or building with more than one apartment unit. REITs that own multi-family communities usually own large apartment complexes throughout different states and benefit from the ever-present demand for a place to stay. This essentially equates to stable earnings and steady appreciation in the long-run.
There are a number of REITs that focus solely on multi-family real estate. Five of which are: Bluerock Residential Growth REIT (BRG), Preferred Apartment Communities (APTS), Equity Residential (EQR), AvalonBay Communities (AVB) and Mid-America Apartment Communities (MAA).
Single-family real estate, the opposite of multi-family, refers to a property with only one rental unit. The portfolios of most residential REITs contain multi-family real estate, however in recent times many REITs focusing on single-family properties have been listed on the stock market. A few examples of such REITs are Starwood WayPoint Residential Trust (SWAY), Altisource Residential Corporation (RESI), American Residential Properties (ARPI) and Silver Bay Realty Trust (SBY).
Office and Other Commercial Properties
Another popular type of real estate that REITs own and operate are commercial properties. These could be office units, retail buildings, warehouses, distribution centers or even data centers. Most of the time industrial REITs either own commercial spaces and lease them to different businesses, however some of them simply manage properties that are owned by other companies in exchange for a percentage of lease payments.
Boston Properties (BXP), Simon Property Group (SPG), Eastgroup Properties (EGP), CoreSite Realty (COR) and Vornado Realty Trust (VNO) are all commercial REITs.
Many hospitals, nursing facilities and medical-related buildings are owned by health care REITs. These REITs do not actually run the healthcare services that are being provided in the buildings. Instead, the properties are leased to different operators. Senior Housing Properties Trust (SNH), Medical Properties Trust (MPW) and Omega Healthcare Investors (OHI) are some of the highest dividend yielding healthcare REITs.
Lodging and Hospitality
A REIT that focuses on acquiring and operating hotels is called a lodging or hospitality REIT. These REITs typically own upper-upscale hotel properties and operate under well-known lodging brands such as Marriott (MAR) and Hilton (HLT). A few hospitality REITs are Chesapeake Lodging Trust (CHSP), RLJ Lodging Trust (RLJ), Sotherly Hotels (SOHO) and Apple Hospitality REIT (APLE).
REITs that invest in farmland are relatively new to the market however they are sure to become more popular as time goes by. Farmland Partners (FPI) and Gladstone Land (LAND) are the first two publicly traded REITs that hold agricultural real estate.
A self-storage business is one that allows both individuals and organizations rental containers that can be used to store possessions. Extra Space Storage (EXR), Public Storage (PSA), CubeSmart (CUBE) and Sovran Self Storage (SSS) are four REITs that own a sizeable portfolio of self-storage facilities. On average, these facilities have a 90% occupancy rate and have low overhead expenses attached to them especially when compared to other types of income-producing property.
The Bottom Line
There are a number of ways to create wealth with real estate. Two of which are by slowly acquiring a portfolio of properties and investing in REITs. No one option is better than another as they each have several advantages and disadvantages that can vary from investor to investor. One reason why a person may choose to invest in a REIT is because they offer access to exclusive property types that require a lot of capital to own like office spaces, hotels and farmland.