Does Owning A REIT Mean I Own Real Estate?


Investors often ask this question.  And the answer is “No.” 

REITs can be traded directly on exchanges, as can the numerous mutual funds which own REITs.  You can’t list your vacation home on NASDAQ tomorrow morning.  Nor could you stay at the exchange next weekend for a quiet getaway.  The obvious point: why would you even want to?  The primary reason to buy and hold tangible, real assets like real estate, is to diversify beyond the “paper” exchanges.

A Real Estate Investment Trust, or REIT, is a professionally managed company that owns a portfolio of investment properties.  REIT owners own shares in the trust, and not part of the actual underlying properties. They trade on stock exchanges just like stock.  REITs can be tempting: portfolio diversification, annual distributions, and capital appreciation, all in one vehicle.

In that respect, there is little difference between a REIT and any traded “paper asset.” 

They can appreciate in value while providing current dividends for owners, and they are liquid.  Liquidity means safety for many investors.  It also means minimal beta, or diversification of a portfolio since REITs follow most of stock market’s fluctuations.  Their dividend payouts are usually greater than a typical stock share, but this can be deceptive as REIT dividends are fully taxable as ordinary income.  

Some investors purchase non-exchange-traded REITs.  This is a perfect combination of the worst of both worlds: no hard asset, limited liquidity, appreciation that is hard to valuate, fully taxable dividends, and little recourse if distributions are changed or frozen.  The circumstances justifying owning a non-traded REIT are rare for almost any investor.

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Owning physical real estate, on the other hand means owning a real asset.  What does that mean?  A real asset is a tangible resource that possesses an intrinsic value due to its utility. A bar of gold can always be melted into jewelry or used to make you that gold tooth you’ve always wanted. A house can keep you dry in the rain.  A bottom glass bungalow over crystal green water can make you happy. 

A real asset is usually also a direct asset, meaning that the owner holds possession of the asset directly, not by proxy as in paper assets such as stocks.  These are almost always held “in street name” by the brokerage firm, separating the investor from the asset even further.

Real estate is a hedge against inflation and has been for centuries.  When it comes to investing, we ought not ignore the eroding effect of inflation on the value of our assets. 

Real estate and other real assets can shield us from inflation because they represent the value of goods and services, not the value of the currency in which those goods and services are denominated. According to the U.S. Bureau of Labor Statistics, inflation has reduced Americans' purchasing power every year but two dating back to 1945. (Stephens, April, 2014). Now that’s real, real scary. 

Next time you drive by a shopping mall or office building, think to yourself “I wonder who owns that….” Then think about how much of your portfolio is real.

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