Advantages of REITs
Investing in real estate investment trusts (REITS) and real estate operating companies (REOCs) offers a number of advantages compared to investments in physical real estate. On this page, we discuss the advantages of REITs, that is investing in real estate through publicly traded securities.
Note that there are also disadvantages to using REITs to invest in real estate. For more details on the disadvantages of investing in public real estate, we refer to disadvantages of REITs.
Advantages of REITs
Investments in REITS and REOCs offer the following advantages:
- Superior liquidity: investors in publicly traded real estate securities enjoy far greater liquidity than investors in physical real estate, because REIT and REOC shares trade on a stock exchange. The low liquidity of a direct real estate investment stems from the relatively high value of an individual real estate property and the unique nature of each property.
- Lower minimum investment. While a direct investment in real estate property may require a multi-million dollar commitment, REIT and REOC shares trade for much smaller dollar amounts. In other words, they allow fractional ownership.
- Limited liability. The financial liability of a REIT to an investor is limited to the amount invested. Other types of investment in real estate, such as a general partnership interest, have potential liabilities greater than the investor’s initial investment.
- Access to premium properties. Some prestigious properties, such as high-profile shopping malls or other prominent or landmark buildings, are difficult to invest in directly. Shares in REITs that have invested in these properties represent one way to take an ownership stake in these assets.
- Active professional management. While a direct investment in properties requires a degree of real estate investment expertise and property management skill, REIT and REOC investments do not. REITs and REOCs employ professional management to control costs, maximize rents and occupancy rates, and sometimes to make new investments.
- Protection related to publicly traded securities. REITS and REOCs must meet the same requirements applicable to other publicly traded companies, including rules related to financial reporting, disclosure, and governance. Investors benefit from these securities regulations by having a board overseeing the management on behalf of the investors.
- Greater potential for diversification. Because of the high cost of a single real estate property, it is difficult to adequately diversify through direct investments in real estate. Through REITs, however, an investor can diversify across property type and geographical location.
We discussed the main benefits from investing in real estate through REITs and REOCs. For more information on the disadvantages, see disadvantages of REITs.