Today, Nav Athwal discusses the differences between real estate investing trusts vs. crowdfunding.
Nav Athwal goes over some of the benefits of crowdfunding and REI Trusts, including how crowdfunding isn’t correlated with the stock market.
Announcer: Welcome back to FlipNerd.com REI classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now let’s meet today’s expert host.
Nav: Hi, it’s Nav Athwal, founder and CEO of Reality Shares, and you’re joining me in the REI classroom today, where we’re going to talk about crowdfunding and investing through our platform, Reality Shares, and how that compares to investing in the REIT market or the stock market. REITs, for those of you who don’t know, is a real estate investment trust, or another vehicle that is used to get allocation and exposure to the real estate market.
Announcer: This REI classroom real estate lesson is sponsored by VirtualStaffNow.com.
Nav: So just stepping back a little bit in talking about the history of REITs, REITs were actually developed in the ’60s and ’70s as a way to bring real estate access to a broader set of the general public. Typically the way to get exposure to real estate would have been buying an asset offline either through a partnership or buying it our right, spending a lot of capital and then getting exposure to real estate, having to worry about the things that a landlord would have to worry about, such as tenants, toilets, trash, etc.
So the REIT vehicle was really created through statute as a way to present a new mode, a new method to get exposure to the real estate market. Not until the ’80s and ’90s did it really started taking off and now REITs account for about $300-400 billion within real estate marketing capital. They have gained popularity amongst the general investing public.
There are two types of general REITs. You have the non-traded REITs and publicly traded leads. The non-traded REITs are private REITs. They are not traded on the stock exchange. They work very much like the private partnerships that exist offline. So you’re investing with private investors. You can’t really trade your shares like you can with public REITs.
Public REITs, on the other hand, are publicly traded. They work very much like stocks in that you can buy into them and sell out them in real time. The REIT market, again, accounts for large portion of how real estate investing works, but still very small compared to the general real estate market, which in the US alone accounts for about half a trillion in transaction volume.
In real estate, crowdfunding through platforms like ours, Reality Shares, is really the newest form of real estate investing. You have the brick and mortar real estate investing through private partnerships now, purchases the REIT market and now real estate crowdfunding. When I talk about real estate crowdfunding or online real estate investing, the first question I get asked often times is, “How is this different than a REIT? Why can’t I just get exposure to real estate by investing in a Vanguard REIT or some other REIT online?” So I want to really take a few minutes to talk about the big differences between real estate investing through platforms like Reality Shares and the REIT investment market.
So one thing is, there is a study done and research conducted around diversification within a portfolio that typically is consisted of stocks and bonds. And that study revealed some interesting things. The first thing it revealed is that investing in REITs and investing in real estate are non-mutually exclusive investments. You can invest in both, and actually investing in both often times gives you the best risk-adjusted returns because the characteristics of the two types investments terms are so different.
Real estate investing through private means or investing through crowdfunding gives you direct exposure to real estate. You own a piece of the asset. Your underlying value of your shares depended on the underlying value of the asset. With REITs, there are external influence is that do impact values.
For example, because they are publicly traded, they are more correlated with the stock market. If you look at the correlation coefficients of REITs in private real estate, REITs are much more correlated with stock market. So if you are looking for an investment that is very much diversified from stock market and has very little correlation with the stock market, you are not going to get that same level of diversification with the REIT as you would get with real estate investing through a platform like ours, which allows you to buy in the private real estate deals.
But there certain benefits that REITs have that private real estate investing doesn’t have. For example, they are publicly traded. Meaning if you had a liquidity need in six months after buying into a REIT, you could sell that share readily without having to go through a secondary offering through a private market, which makes it really hard to sell your shares. So there’s instant liquidity, which is a big benefit of REITs.
The other big difference is if you think about real estate investing through platforms like ours, one of the things we strive for is yield. Investors have come out of the Great Recession in a very low yield environment, where they are trying to earn yield out of the bond markets and money market accounts in looking for alternatives. I think our platform and platforms like ours really aim to provide investors yields they’re not getting other markets. Dividends yields, on the other hand, have hovered around 2-3% outside the mortgage REITs, so you’re not going to get that same level of yield you would get through an online platform like ours with the REIT market.
So just generally to sum it all up, REITs and real estate are not mutually exclusive investments. You can invest in both, and there is a research that shows you should invest in both to really maximize your risk-adjusted returns. You have the liquidity that REITs bring. Private real estate doesn’t have that liquidity but does have less correlation with the stock market so you’re going to get better diversification. So I think smart and savvy investors that are looking for exposure real estate should really think about getting exposure to both REITs and private real estate.
Private real estate, again, historically has been difficult because of the way it works and the large capital amounts required. We’re proud at RealityShares to be offering a solution that does allow investors for as little as $5,000 and get exposure to real estate investments across the country. So that’s your primer on REITs versus real estate for the day. Again, you’ve joined us here at the REI Classroom. My name is Nav Athwal, founder and CEO of RealityShares. Until next time, talk to you later.
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