Are REITs stocks or real estate?

Question

A question has been posed internally at BP by @Mindy Jensen and I'm wondering what the communities take is - when you invest in REITs do you consider it investing in a stock or investing in real estate? To quote Mindy "you buy it like stocks, but it's backed by real estate holdings..."

I'll share my personal opinion but I want to hear what you all think first!

I'll share my personal opinion but I want to hear what you all think first!

Evan Polaski · Answer

To a certain extent, this is like asking: If I buy Apple shares, is it a stock or a tech?

My point stocks and real estate are apples and oranges.  Stocks are an avenue of ownership.  Real estate is a asset class.

I understand the question you are trying to pose, but for education purposes a REIT is a tax structure.  You can have publicly traded REITs (most people's view of REITs), you can have non-traded REITs, you can have partnership REITs, you can have a private REIT, etc.

More directly to your point: public REITs have a high correlation to the broader stock market, so if you are trying to build an investment portfolio that has non-correlated and lower correlated holdings, then public REITs are typically not going to provide that diversification in any meaningful way.

Chris Seveney · Answer

For syndications its typically a K-1 form which are the worst. If you own stock its typically a 1099-DIV.

For example we have our Reg A fund that issues 1099-DIV to our shareholders or 1099-INT to our bond holders, our accounting gets those out before Jan 31st as required (zero complaints). Our K-1's in a legacy fund we typically do not get to investors till April or May (yes they are late) because we are at the mercy of our third party CPA and yes its super frustrating.

I specifically set up our fund structure to NOT have K-1s because of how much I despise them

James Mc Ree · Answer

The answer is "Yes". It is a stock, though really a trust and it's business is a collection of real estate stocks. You are mixing apples and tennis balls. The question is the same as asking of Coca Cola, is the company a stock or soft drink company?

As @Clayton Silva wrote, you have much less influence with a REIT than a traditional stock. The REIT is usually just a shell that owns other companies. If you aren't happy with what some of those companies are doing, you have a tiny voice in the REIT suggesting selling the company stocks, but no voice regarding their operations. You would have a tiny voice with the companies if you owned their stock directly. The REIT has diversification benefits and usually pays a pretty good dividend.

I used to use REITs as a proxy for investing my cash in real estate. I found they were not as stable as real estate and had the volatility of stocks, so it wasn't really suiting my goals. I get 4.25% - 4.5% in a money market for my cash now.

Clayton Silva · Answer

You have no title ownership, little control if any, and likely little to no voting rights, no say in how the project runs or is managed, no ability to directly add equity other than more capital contributions.

Jules Aton · Answer

Stock. In 2021-2022 I was tired of being a landlord and sold several rental properties that had appreciated nicely. My thought was to invest in REIT Index fund as a truly passive way to keep a RE component in my asset allocation. It became apparent quickly that the REIT fund was mimicking the TSM fund which btw also contains REITs. I liquidated the REIT fund. My AA now is back to TSM, RE and a small % of cash for SORR protection because I’m getting close to retirement.

JD Martin · Answer

I consider REITs closer to a form of bond investing. In theory, you own a limited piece of the trust, which is essentially the corporation, whose business is operating real estate for profit. As you are almost always a limited partner, you have essentially no control in the trust once you've invested your money. With stock investing, in theory one could obtain enough stock to take control of the company whereas in a REIT the controlling "stock" is pretty much always defined and held by the general partners. As a limited partner you are essentially a miniature bank, loaning money to the principal owners, for a defined rate of return, kind of like purchasing US Treasury notes. However, not only can the REIT default, leaving the LPs without value, they can also incur capital calls and other financial requirements that will force you to pay to play, ie to maintain your investment without dilution or wipeout.

Chris Seveney · Answer

A REIT is typically a corporation who is passive and takes specific tax advantages. Its investors are shareholders who own shares in real estate. My company is also a corporaiton and we issue shares to investors - who are shareholders as well. I consider it investing in real estate as that is what is backed by and the stock is just the investment instrument - some may invest in debt instruments like bonds and other shares. In a syndication you are a limited partner. In a syndication, reit or a fund, you are a passive investor investing in real estate and whether its a stock, bond or some other instrument that is what you hold.

Rene Hosman · Answer

What a concise and well thought out answer, no surprise from you Chris, you always know your stuff!!

My opinion on the matter was that a REIT is a stock because all stocks are backed by different assets and REITs just happen to be backed by RE, however you're not just investing in the RE you're investing in the systems and processes of the businesses that run them which is key IMO. But now you have me thinking about this differently when you say the stock is just the instrument by which you invest...

Rene Hosman · Answer

What a great and succinct answer! Thank you for this!

Chris Seveney · Answer

You explained this a lot better than I did. I think many people do not understand what a REIT is, which you hit nail on head - its a tax structure

Are REITs stocks or real estate?

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