What Is a Real Estate Investment Trust (REIT) and How Is PeerStreet Different?

Posted May 10, 2017

What is a Real Estate Investment Trust? If you are a real estate investor, you know what a REIT is. But just in case, let’s have a little refresher.

Simply put, a REIT is an investment company that owns real estate-related assets such as land, real estate securities, and both commercial and residential real estate. These properties are income-producing and often function as an alternative to the stock market for both large institutional investors and smaller individual investors.

How Does PeerStreet Compare To REITs?

It makes sense to draw comparison between PeerStreet and REITs, since we have many investors who ask. After all, both allow investors to deploy their funds across related assets, with real estate experts doing all the heavy lifting in the due diligence realm. However, some REITs are less diverse than they seem. PeerStreet empowers investors with the ability to customize a portfolio that’s as diverse as they’d like, by selecting properties across various geographical regions. In fact, we value making a diverse group of loans available across different markets, lenders, return rates, terms and LTVs.

Beyond diversification, PeerStreet offers more flexibility and transparency than what’s available when you invest in a REIT. You have the ability to self-select loan investments from our pre-vetted opportunities and build portfolios of individual loans based on specific geographic regions, property types, loan maturities, etc. We provide important information about each property and its corresponding loan on the platform, encouraging investors to be familiar with their own investments. We also believe PeerStreet’s fee structure is generally less onerous than that of many REITs and allows investors to capture higher yields.

Furthermore, investors may be hard pressed to find a REIT that has a track record equivalent to PeerStreet. We are proud that we’ve had zero losses to date. One of the differences resides with our dedicated servicing and investment teams who move quickly to resolve late payment issues and defaults when they start to occur.

Benefits of Real Estate Investment Trusts

REITs can be either publicly or privately traded, but both raise funds directly from investors and re-invest in real estate with the help of real estate experts. Many people prefer investing in hard assets, such as real estate, precious metals, oil, natural gas and farmland. In the event of a decrease in return or loss in value, investors are usually able to recoup some of their investment by acquiring the physical property, especially in times of economic upheaval.

REITs are one way for investors to participate in the real estate market without doing the property purchasing and vetting themselves. However, REITs have come under much scrutiny for the fees, both visible and hidden, involved. REITs are large entities and require large budgets to operate, which drive high-fee structures, including commissions paid to broker-dealers. Investors are burdened with paying fees to help run the larger organization.

How Do REITs Work?

Shareholders receive any taxable income produced by the REIT’s real estate holdings in the form of dividends. REITs appeal to investors because they feature high dividend yields, stock market diversification and long-term capital appreciation.

For public REITs, owning a share of a REIT is like stock, because it’s highly liquid and tradable, but instead of investing in a single company, you’re investing in a portfolio of properties. This provides diversification of investments. Instead of conducting the research on properties prior to investing on your own, real estate professionals conduct due diligence, evaluate the credit of commercial tenants, supervise taxes and government regulations. REITs bundle real estate investments and handle so investors can have access to the overall investment.

PeerStreet operates in a similar fashion, but an important element of our model gives investors the control. We believe this is important to our investors. For example, a certain investor may not be interested in investing in properties in a certain location because of perceived risks involved. If this is the case, they can customize their real estate portfolio to reflect their specific sensitivities to regional weaknesses or preferences in property type. PeerStreet puts the decision-making powers back into the hands of investors.

The Downside of REITs

Certain REITs focus on very specific types of properties (multi-family buildings or industrial warehouses) and they are often also concentrated on certain geographical regions (Florida vs. New York City). If you are looking to diversify, these types of REITs may not be ideal for your investment profile. When investing in a REIT, it’s important to research the level of diversity of the properties. Not all REITs may be as diverse as you think.

With investor funds, REITs fund or purchase a piece of real estate and then designate at least 90 percent of rental income to investors or shareholders through dividends. REIT managers seek to earn a profit over time based on rising real estate values. The obvious con is that the REIT management controls the investment strategy, not you.

Real Estate Investment Trust Exchange Traded Funds (REIT ETFs)

An Exchange Traded Fund is in an asset class of its own. Like mutual funds, ETFs are an investment fund, comprised of a variety of stocks, bonds, commodities and real estate, and traded like stocks on an exchange. The key difference between ETFs and mutual funds is that ETFs are available for sale through the trading day. Mutual fund shares are only bought and sold at the end of the trading day.

REIT ETFs combine the properties of the two investment vehicles that make up their name. These are ETFs that are exclusively made up of REITs. This model offers powerful diversification across an asset class that is somewhat lacking in diversity. After all, there are only 200 publicly-traded REITs in the United States. Some investors like the passive nature of REIT ETFs and their simple trading patterns.

PeerStreet’s Unique Model

Many of our investors prefer PeerStreet over REITs because of the transparency and efficiency we bring to the real estate industry. We encourage investors to be educated on each investment to which they allocate funds. However, you should not have to be a real estate expert to invest. We continue to grow the technology and tools available on our platform so that we can keep bringing a more level playing field to our investors.

As mentioned previously, PeerStreet maintains conservative underwriting standards to benefit our investors and we are proud of our zero loss record to date. Our servicing and investment teams work diligently to find solutions to prevent losses. PeerStreet doesn’t structure our model with hidden fees that we pass on to investors. Rather than mimicking the structure of a REIT, we are working towards giving individuals access to investment opportunities they never had before.

By democratizing this space, PeerStreet aims to provide more control to individuals investing in real estate. Quality real estate investing shouldn’t just be available to Wall Street investors, or to Main Street investors. PeerStreet makes investing in real estate more transparent and accessible to investors.