by Yieldstreet | Staff
Investors who are considering entering the real estate market have some interesting options. For example, investors can purchase shares in real estate investment trusts (REITs) or make direct investments. These are just two examples of ways to invest in real estate. Let’s explore the key differences between REITS and direct real estate investments, as well as some of the pros and cons of each option.
REITs give investors access to a diversified real estate portfolio. These come in a variety of structures. The typical REIT—a company that owns, operates, or finances real estate and other fixed income producing-assets—has publicly traded shares that can be purchased on a national exchange.
A REIT company may fund the underlying properties directly. These companies, known as equity REITs, are typically involved in the construction of office buildings or the management of apartments or hotels. Alternatively, mortgage REITs may purchase asset-backed securities or make direct real estate loans.
REITs must register with the SEC, and they’re subject to various regulations, most notably the requirement to pay 90% of the company’s taxable income in the form of shareholder dividends each year. There are also REITs that are not traded on an exchange, have potentially hefty fees, and more limited liquidity options.
The result is that a REIT provides access to a diversified pool of real estate investments that are almost impossible for the typical investor to create on their own.
The typical retail investor may not have enough liquid capital to take a diversified approach to the real estate market. They also may not have the expertise to assess the risks of a real estate investment. These investors may prefer a pooled approach to real estate. A REIT may be a great alternative. Investors not only get access to an income-producing product, but also to one that’s managed by professional real estate investors. Equity REITs, which are traded on national exchanges, have low capital requirements because investors are buying a share of the trust. Since it’s traded on the public equity market, an investor can buy and sell these assets with few liquidity constraints.
REIT investors are also taxed more favorably on income from the investment. Income is not typically taxed at a corporate level because the income from these pooled real estate assets is passed through to the investor. Unlike a large company where all income is taxed before distributing dividends, REIT investors receive profits as ordinary income.
Lastly, investors in real estate may not always be bullish on the space. Unwinding and subsequently shorting a real estate project without using an equity REIT would require considerable savvy and potentially even the use of expensive derivatives. In contrast, REITs allow speculators to go long or short, depending on their market view.
REITs are a massive pool of assets that make understanding the underlying risk quite difficult. An average investor may struggle to comprehend the portfolio beyond simple summary statistics.
REITs can also be more expensive than a direct lending approach. Fees charged for REIT managers’ salaries, for example, can eat into investors’ income. Savvy real estate investors with enough capital to diversify may be able to achieve higher returns by managing assets themselves.
Real estate investments can offer a diversified investment, typically uncorrelated to the stock market, for those seeking income and, in some cases, intermediate or long-term wealth generation. A real estate investor can invest in a wide variety of locations, property types, stages of development, and real estate classes to help diversify their portfolio.
Real estate investments are popular for several reasons. Investors enjoy the benefits of this typically uncorrelated, fixed-income asset to diversify portfolios of all sizes. The real estate market may provide direct access to new regions and allows investors to invest in local economies that may behave differently than macro trends.
This space is constantly innovating. Investors today have access to many unique structures. Bridge loans are one option for investors seeking a high-yielding, short-duration product. These loans help finance development companies with short-term capital constraints, which may include construction projects that need capital to be completed on time or a company looking to expand while assets are tied up in uncompleted projects.
Qualified Opportunity Zones (QOZ) are another new development in the real estate space. These projects are funded in areas of lower economic health. Part of the perks of investing in QOZ are deferred, reduced, or no taxes on capital gains, depending on where funds are generated. These perks mean investors who have previously earned in QOZ may reinvest since they pay no taxes on their earnings. These investments are designed to spur economic growth in low-income communities.
A direct investment in real estate does not come without risk. The liquidity risk of investing in the physical development or construction of a project is considerable, especially during economic downturns. The brokerage fees that come with selling a real estate project can eat into returns, compared to REITs.
Furthermore, the public availability of material information is not always present. It’s important to work with trusted parties and domain experts when dealing with real estate investments because dealers’ incentives are often misaligned.
Diversify Your Portfolio Today
For investors seeking a differentiated, income-driven investment product, the real estate asset class offers a wide variety of structures and options. Regardless of your portfolio size or liquidity constraints, real estate investing can be a great option for investors looking for typically uncorrelated, diversified fixed income. Asset-based lending provides the investor security, and experienced real estate managers help reduce risks when making a real estate investment. Through bridge loans and other short-term structures, a direct investor may be able to generate a balanced return with relatively short duration.
Sign up with your email address
Securely verify your identity and link a bank account
Verify your accreditation (if applicable) to access all of Yieldstreet’s offerings.
Our weekly podcast providing ideas about how to make money work for you and bring you closer to your dreams.
1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.
2 Represents an average net realized internal rate of return (IRR) with respect to all matured investments in your portfolio, utilizing the effective dates and amounts to and from the investments and net of management fees and all other expenses charged to the investments. Past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision. All securities involve risk and may result in significant losses, including the loss of principal invested.[read more]
3 "Annual interest" or "Annualized Return" represents an annual target rate of interest or annualized target return and "term" represents the estimated term of the investment. Such target interest or target returns and estimated term are projections of the interest or returns and or term and may ultimately not be achieved. Actual interest or returns and term may be materially different from such projections. This targeted interest or returns and estimated term are based on the underlying investments held by the applicable.
4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.
5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.
6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including Dec 22th, 2021, after deduction of management fees and all other expenses charged to investments.
7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Prism Fund before investing. The prospectus for the Yieldstreet Prism Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetprismfund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.
8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.
No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.
Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefor.
Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.
Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.
Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.
Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.
Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and willing and able to accept the high risks associated with private investments.
Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.
Banking services are provided by Evolve Bank & Trust, Member FDIC.
Investment advisory services are provided by YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission.
Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.