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equitymultiple.comThe Difference Between REIT’s & Investing with EquityMultiple
Modern Real Estate Investing
© 2015 EquityMultiple, Inc. All rights reserved.
If you’re reading this you probably already know that
commercial real estate has long been a feature of
sophisticated investor portfolios. The reasons are
obvious – U.S. real estate returns have historically
outpaced the stock market and real estate offers a
variety of indirect benefits, including portfolio
diversification, providing a hedge against inflation and
the stability of investing in a tangible asset. Real estate
investment volumes reflect investor appetite for the
asset class. More than $300 billion in commercial real
estate transactions were completed in the U.S. in 2014
and continued growth is projected for 2015.
Despite this incredible transaction volume,
commercial real estate investment opportunities have
long been relatively difficult to access. Investors have
historically had three options:
Invest through a public or private REIT
Invest in a real estate focused private equity fund
Invest directly through a friend or business associate who happens to show you a good deal
Intro
© 2015 EquityMultiple, Inc. All rights reserved.
While each of these avenues has pros and cons, this
article focuses on the issues associated with investing
through REITs and the comparative benefits of
investing through an emerging alternative – online
investment marketplaces, or as you’ve probably heard
them called, real estate crowdfunding platforms.
REITs offer easy access to centrally operated real
estate portfolios, which make them a popular choice
for investors looking for real estate exposure but
lacking direct investment access and unwilling to
invest the high minimum amount required by private
equity funds. REIT returns are also compelling,
particularly in the current low interest rate
environment.
The NAREIT REIT Index has produced
an 8.8% annual return over the last 10
years. Despite the solid overall re-
turns, public REITs are characterized
by sometimes extreme market
volatility.
© 2015 EquityMultiple, Inc. All rights reserved.
Despite the solid overall returns, public REITs are
characterized by sometimes extreme market volatility. In
2010, as public REITs shook off the effects the recession,
annual returns ranged as high as 27.5% but in 2013, with the
U.S. real estate market booming, returns sagged to 3.2%.
Rather than being strongly correlated with the value of the
underlying real estate, the recession revealed that REITs are,
in fact, strongly correlated with the public markets. This
correlation undercuts the diversification and inflation
hedging benefits of other forms of real estate investing.
Private real estate investments show a low correlation to the
public debt and equity markets (between -0.03 and +0.25)
and thus have strong diversification benefits in portfolios
that also feature stocks and bonds.
Correlation of REITs to Public Markets
Correlation to Public Markets
Public REITS
.82
High
.48Low
.25High
- .03 Low
Private Real Estate Investments
© 2015 EquityMultiple, Inc. All rights reserved.
Private REITs offer insulation from the volatility of the
public markets but are marked by high fees and, at
times, a lack of transparency. Most non-traded REITs
have front end fees of 12-15% and may have additional
ongoing or milestone fees. Despite these fee loads,
and the accounting scandal that recently shook up
ARCP, the world’s largest REIT, money has poured into
these vehicles. In 2013, privates REITs raised a record
$19.2 billion. That number receded in 2014 to $15
billion in the face of increased criticism and with the
rise of viable alternatives for investing in real estate.
The Benefits of Real Estate
0.5 - 1.5 %
Typical EquityMultiple Investment
6 - 7 %
Traded REIT
12 - 18 %
Non-Traded REIT
© 2015 EquityMultiple, Inc. All rights reserved.
Direct real estate investments, like those offered by EquityMultiple and other investment marketplaces, do not have the
market volatility associated with public REITs or the burdensome fees of private REITs. The NCREIF Index which tracks a
very large pool of private investment commercial real estate, gives a sense of just how profitable the sector has been.
With the notable exception of 2008 and 2009, annual returns have been above 10% each year since 2004 and ranged as
high as nearly 19%. The returns offered through real estate investment marketplaces will vary widely depending on the
underlying asset, the risk profile of the business plan and the structure of the investment.
Direct, or “Crowdfunded” Real Estate Investing
2
20%
0%
- 20% 2000 2005 2010 2015
Typical Return of EquityMultiple Investments
8 - 20%
Average Annual Returns, NCREIF Index
© 2015 EquityMultiple, Inc. All rights reserved.
Stable, cash flowing assets with major tenants on long
leases may produce a yield more similar to a risk
adjusted bond, while value add and ground up
development projects offer far higher returns because
of their significantly different risk profile. Part of the
power of investment marketplaces is they allow
sophisticated investors to make their own decisions
about what assets are right for their portfolio. REITs
face limitations in how and what they can invest in by
virtue of both their size and structure. While investors
may know a REIT’s strategy, they generally will not be
privy to any particular investment decisions.
Direct, or “Crowdfunded” Real Estate Investing
REITs EM & other platforms
Transparency
Personal Choice
Wide range of Risk & Returns
Liquidity
Protection Against Market Volatility
© 2015 EquityMultiple, Inc. All rights reserved.
The bottom line is that your portfolio may have room for both REITs and
marketplace investments because they serve different purposes. REITs
offer solid returns over the long term, ease of investment and a degree of
liquidity but some of the advantages of investing in real estate are
mitigated by that very liquidity. Real estate investment marketplaces
empower you to find a real estate investment opportunity that matches
your goals, whether you’re looking for a stable cash flowing deal for
diversification or a value add deal with the possibility of portfolio
boosting returns. This represents a significant innovation in real estate
investment, modernizing an offline process by bringing it online.
© 2015 EquityMultiple, Inc. All rights reserved.
This introductory series aims to give you a solid
grounding in investing through online real estate
platforms - how to best capitalize on this new world of
access, and how to best protect yourself against risk.
Please stay tuned for the third installment:
Asset Categories
http://www.wsj.com/articles/nontraded-reits-offer-
high-returns-but-critics-cite-fees-and-
illiquidity-1402670753
https://www.ncreif.org/property-index-returns.aspx2
1
Sources
Questions?
contact@equitymultiple.com
Explore the Platform: www.equitymultiple.com
Thank you!
equitymultiple.com
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