Property investment is a significant commitment that can cost hundreds of thousands of dollars, if not more. A few years ago, some smart finance people came up with a Real Estate Investment Trust (or REIT) as a solution.
Conceptually, a REIT is very similar to mutual funds. You’re busy and may not have the time or expertise to make sound investment decisions. You don’t have enough money to make the best deals. You hand your money over to a fund manager, who pools funds from small investors like you and invests in various properties.
You can diversify your portfolio and gain access to the growth and cash flows of many premium properties. This is what you want. REITs can also be traded. You can also sell units to other investors who are willing to purchase them, just like Equities and Bonds.
You now have an expert property manager who can diversify and provide liquidity. This is the best thing since sliced bread.
It’s wrong.
Although REITs are conceptually very appealing, their performance leaves much to be desired. Let’s look at the benchmark REIT Index in Australia.
Investors have experienced a 3.5% loss in the past ten years. Although there was the GFC in 2008, equity markets suffered a similar fall and have since rebounded spectacularly.
The theory is that the property market experienced a severe crash in 2008 and has been limping ever since. However, the expert property manager was not to blame.
Again, wrong.
The 2008 crash that hit Australia’s property market was not a serious one. Since then, they have performed well. The fees charged by the fund managers should have at most mirrored the market performance if they were truly expert fund managers. They have added white elephants to their portfolios. They will charge fees regardless of whether you make or lose money. They always win!
Individuals should have control over their investments. The majority of people have good local knowledge. They are able to tell which property development will be a failure and which one will be a success. They have an inborn knowledge of many local factors that fund managers sitting in high-rise offices will not know or care about. Property isn’t volatile, unlike equities. It is not necessary to be glued to a screen, worrying about whether asset prices will go up or down. Your manager only has a limited role in selecting your assets.
Crowdfunding real estate platforms allow you to choose and select the properties that you wish to invest in while still investing small amounts. Have a look at real estate crowdfunding for non accredited investors. This way, you won’t be charged excessive fees or be saddled by white elephants.
