equitymultiple.comThe Difference Between REIT’s & Investing with EquityMultiple

Modern Real Estate Investing

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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

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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.

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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

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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

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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

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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

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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

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