Big Fat Real Estate Checks Ep 168: Real Estate vs. REITs in 2024: Which Should You Buy?

“it is your God given right to be wealthy through the service of others, and understanding and educating yourself to have the best possible tools, education, knowledge, and data necessary in order for you to hit the ground running and get great results, which is all that matters at the end of the day.”
– Marco Kozlowski

Marco Kozlowski and Gabriel Araish discuss the benefits and risks of investing in REITs, emphasizing their liquidity and diversification benefits but also cautioning about volatility and dilution risks, particularly in publicly traded REITs.

Gabriel highlights the potential for better returns in private real estate investments over REITs, advising investors to thoroughly research private equity firms before investing, while Marco underscores the importance of integrity and understanding the distinctions between direct and indirect real estate exposure.

Listen to the episode on Apple PodcastsSpotify,  Podcast Addict, Listen Notes, CastboxGoogle Podcasts,  Podchaser, or on your favorite podcast platform.


[0:02] REITs (real estate investment trusts) and their benefits, including liquidity and diversification.
[5:16] REITs and their potential for returns, with mention of dilution and sustainability concerns.
[9:15] REITs, fees, and taxes.
[12:25] Real estate investing, fees, and risk.
[16:42] Private real estate investing vs. public REITs.

Please enjoy this transcript, but please note that it may contain a few typos. With many episodes lasting over 2 hours, it can be challenging to catch minor errors. Enjoy!

Marco Kozlowski: Everyone, Welcome to Big Fat real estate checks. My name is Marco Kozlowski. I’m here with
Gabrielle Araish. And we have no Frank a moment of silence. For an out of frankness for being
frankness. You had a meeting that he had to attend. And since I woke up late today, and I
missed the appointment, it is totally cool for Frank to, to carry on with his day. And the beauty
of doing what you want when you want is, you just can do what you want, when you want. And
today, we’re going to be discussing how you can do what you want, when you want and where
do you want to do things in, which is what big fat real estate checks is all about. And if, if you
have been listening to us or following us for quite some time, our mandate is to serve you at
the highest possible level, which is our value system to serve you at a very high level. So you
can get wealthy because it is your God given right to be wealthy through the service of others,
and understanding and educating yourself to have the best possible tools, education,
knowledge, and data necessary in order for you to hit the ground running and get great results,
which is all that matters at the end of the day. So today, we’re going to be discussing REITs it’s
one of the top five Google’s searches and trends and I know a little bit about REITs and I
understand the concepts but Gabe is I think knee deep in these things. So he he swims with
REITs He tames REITs See, he has REITs as pets. You know, he feeds REITs you know in the
morning and take him for walks. He sleeps with REITs like he knows REITs well, so talk to us
about REITs

Gabriel Araish: Oh remaster REIT, a REIT. So maybe first we need to explain what a REIT is, it’s a real estate
investment trust, that’s what it stands for. And there are private REITs and public REITs. But the
REITs that most people, Google would probably be the public REITs because it’s basically
REITs that most people, Google would probably be the public REITs because it’s basically
investing in real estate, but via the stock market. So you’re not really buying a piece of real
estate, you’re buying a piece of a company that is owning and operating real estate. And and
that’s a very significant difference than owning real estate. It’s basically the equivalent of you
buying shares in or paper gold, if you will, versus buying the actual physical gold that you get
shipped to your house. So that’s the difference. And,

Marco Kozlowski: like gold me that paper like gold leaf gold leaves, like

Gabriel Araish: a certificate that says that you own gold,

Marco Kozlowski: that’s what I make. That’s what people don’t know what paper gold is, understand that. So fair
enough. Buying a share in gold, that says that piece of gold versus actually physically owning
the gold.

Gabriel Araish: Correct. And so there’s, you know, of course, there’s a lot of people out there that want to be
exposed to real estate, and there’s the gold physical, that want to be exposed to real estate.
But their mindset is, you know, I don’t want to change toilets, I don’t want to operate this stuff,
I just want to take advantage of the real estate, industry slash momentum. And that’s the best
way they can do it. And at the same time that the bonus of investing in REITs, publicly traded
REITs is that it’s a liquid asset right for you. So if there’s a knock on real estate is that it’s an
illiquid asset, it takes time to sell if you own a piece of real estate, and you need money
tomorrow. You can’t necessarily do that. I mean, it’s possible, but it’s highly unlikely. Whereas if
you own a share of a REIT, and you need your money tomorrow, you press the sell button and
it’s instantly the money’s transferred to your account. But it’s at whatever it’s worth on that
day, but it’s your decision to do that. So, that’s kind of the pros of investing in a REIT. So, you
can diversify your portfolio by buying shares of a REIT, you are exposed to real estate, you
know most of them pay a you know a dividend of some sort. So there is to a certain extent, a
cash flow option to it. And you can you can sell quickly. But let’s kind of dig into what’s under
the hood of a REIT and how they operate how they work because That’s where you once you
understand that, you’ll, you’ll be able to make a better determination as to whether or not the
things I mentioned that were pros are benefits enough that outweigh the cost that I’m going to,
you know, walk you through.

Marco Kozlowski: So. So, from a liquidity standpoint, I can start with a very little, a little sum of money. If I have
1000 bucks, I can buy a piece of a REIT.
1000 bucks, I can buy a piece of a REIT.

Gabriel Araish: Yes, or shares correct shares, right?

Marco Kozlowski: A portion of a share of a REIT Exactly. It’s liquid, which means if I put $1,000 in, I can pull my
$1,000 out whatever it’s valued at that time. From a return perspective, I’m assuming that it’s a
lot less volatile, since we’re trusting those that are managing the REIT to grow the money at a
certain percentage. And I don’t know what the average return is, but I’m assuming it’s
somewhat positive. In most cases. Yeah.

Gabriel Araish: But it is depending on the timing. Right. Right. But based

Marco Kozlowski: on whatever real estate that they own, and the values the value of the real estate that the
share is based on, based on or is it the cash flow that’s generating that is based on? Because if

Gabriel Araish: if I don’t think there’s a correlation, because when you’re buying shares, it’s supply and
demand. So if you if a lot of people want to buy the stock, the price goes up, if a lot of people
sell the stock at the same time the price goes down. So there’s no real, it has nothing to do
with the real value stuff. No, I mean, it does to a certain extent, where if your real estate is
doing well, more people are going to want to buy it. But it’s not a direct correlation, where if
you’ve increased the value of your of your property, tenfold that your stock is gonna go up
tenfold. Right? So that’s what I’m saying

Marco Kozlowski: you could technically have a billion dollars in real estate, right? A billion dollars in real estate,
but the share be worth $2 billion dollars in valuation market share, because, yeah, supply and
demand of that. So you’re basically that’s interesting. All right,

Gabriel Araish: vice versa, too, though, and depends on how many shares they sell, right. So there’s, there’s a
lot of dilution that goes in there. I mean, I’m not a stock market expert by any means. But, you
know, I’ve read enough prospectuses of REITs. And a prospectus is just the document that most
know, I’ve read enough prospectuses of REITs. And a prospectus is just the document that most
of them, well, all of them who go public have to create in the US, it’s called a registration
statement. And in Canada, it’s called a prospectus. And that’s how you IPO and in there,
basically, there’s the whole, the whole nine yards of the works of how that that read is
structured, what their leverage permitted is, like, are they allowed to borrow 80% of the value
60% 40%. And you know, what they’re investing in. And so having the benefit of having read
these as, as a member of the regulator, I know exactly how they work. And even though they
give you distributions, you got to make sure that the money that they keep in the business is
actually enough to pay distributions, because I’ve seen cases where the distributions were
higher than their, a FFR, which is the, the, basically the income that they have at their adjusted
funds from operations. That’s what it stands for. And that’s basically what’s left over from, you
know, once all the expenses are paid. And if you’re distributing more than what is left over,
then you’re basically borrowing to pay distributions. So it may sound good to you, because you
have, you know, let’s say it’s a 6% dividend, 8% dividend, and you’re like, Okay, I’m getting six
8% on my money. But if they’re continuously borrowing to pay for that, then your stock share
eventually is going to start dropping, right? And so you’re, you’re you’re going to be losing
money on that front. So you’ll have a capital loss if you decide to sell and it’s really not
sustainable in the long run. Now, sometimes it’s sustainable, because it’s, it’s, it’s what it takes
in order to get off the ground. And people you know, there are REITs that could make that work,
but it’s, it’s, you know, it’s a slippery slope. And I don’t know that that’s enough value for you to
take that risk. But here’s if we go into even deeper, because I’m going to I’m going to show you
what the alternative to all this is. But let’s say you you’re buying into a REIT the way I read a
structure if I’m the operator of the REIT, if I’m the founder of this REIT, so typically, we’ll create
a fund will buy will buy what will raise money and will buy real estate with it. But then what’s
not clear to most people don’t read the prospectus is the same management team. They
actually have a separate entity that is private that they own. That is will serve as the manager I
have the REIT. And basically, the REIT rents out, the CEO rents out the CFO and other
members. So they pay fees to this management company to basically get the time of these
individuals. They also pay management fees for them to actually for that company to manage
the property. And there’s all these fees that keep going back to the founder. So the founders
get extremely wealthy, it’s a really, really solid proposition for them. And in fact, like, if I’m an
operator, the end game is going to be to take my private REIT into a public REIT, for those
reasons. All right, so for an operator, that makes total sense, but for an investor, you got to
really dig into the fees and make sure that it all makes sense in the end, because that’s all
going to impact the value of that company, which is what you’re investing in. But the value of
that company is sucked out by a management company that’s private, that’s owned by the
founders. So again, I can’t say, you know, sit here and tell you that they’re all like this, but the
ones that I’ve read the prospectus of, most of them are similar, and that’s kind of how they
operate. And that’s the only way it really makes sense for them. Because also to be a trust or
real estate investment trust, there’s there’s the reason they’re trust is because they’re
impacted on a tax basis. And they don’t have to pay taxes, as long as they distribute 95% of
their funds from operations or $1, adjusted funds from operations. The issue is that, you know,
you’re thinking, Okay, well, that’s good. So everything they make profit, they got to distribute
95, or they don’t get their tax breaks, that’s true. The problem is, what are the expenses that
had happened between the gross revenue, and when you get to that leftover that needs to be
fully distributed or almost fully distributed? And that’s where you have to have a keen eye on
that when you’re reading the prospect is to know, what comes before that adjusted funds from
Operation light. And that’s going to be distributed to you? And what what is left over? That’s,
that’s where you have to pay attention. And is that sustainable? If they continue on that on that
trend? Also, how much are they leveraged, already fully leveraged? Are they allowed to borrow
8090 95%? Because the more their leverage, that’s more risk against the asset. And that
means that it’s more risk to you. So, again, there’s all these cons, the pros that we’ve
discussed, but the cons, I don’t know if those are, are worth it. And I know that, you know, I
don’t really invest in the stock market, like, I’m happy to do real estate myself, I don’t I don’t
have to do it that way. But just from, like, an overview of looking into them, it just doesn’t make
sense. I can get better returns, doing it passively, but differently. So if, if you want, we can
discuss that now, where, you know, what’s the offset, like when we’re talking about private
REITs, they’re not necessarily private REITs they can be syndications or funds that invest in real
estate that you can invest in. Now, granted, another pro of investing in REITs is that you don’t
necessarily have to be an accredited investor or a high net worth individual. Whereas in most
private private equity funds where you know, they invest in real estate, you may need to be an
accredited investor, which means that you have to, you know, make $200,000 or more a year,
or, you know, have a net worth of a million dollars, excluding your primary residence. But there
are also funds that operate under a certain exemption where they’re allowed to raise money
from 35 people that are non accredited, which would mean, you know, if you don’t meet that
criteria of 200,000, or million net worth, but you’re the fund that you want to invest in, is what
we call a 506. B fund, they are allowed to raise money from 35 people that are non accredited,
so that, you know, that means that basically everybody qualifies for those spots. So, and why is
it more advantageous to invest in those? Yeah, so

Marco Kozlowski: I don’t know if my microphone is working. Can you hear me?

Gabriel Araish: I can hear you at your your screen your camera’s a little bit foggy? Because

Marco Kozlowski: trying to chip in chirp in and I don’t know if you can hear me

Gabriel Araish: Yeah, then I didn’t hear you know, I just this is the first time Right, right. Right, Ken? My

Marco Kozlowski: very strange because I interjected a few times and then you just kept talking to me. Okay, well,
I guess he can’t hear me so I have to reset my my system. Sorry about that, folks. So you
unpacked a whole lot there that I want to play with a little bit number one is sure. I want to
circle back to the what does that look like as far as the fees and the the renting of you know, of
my of their expertise? And that’s super fascinating to me, and you’re saying They get extremely
wealthy, obviously, they from a percentage basis, or dollars basis where, obviously it’s relative,
if you’re dealing with a million dollars, or $100 million, or $10 billion, it’s no different. But

Gabriel Araish: the percentage will be will be, it’s a more or less standard error, it’s in the three 4%. Sometimes
it goes up to five 6%. But it’s percentages for everything. So there’s a percentage for
management fees, then there’s either a percentage or a salary that’s paid off to the
management company in order to be able to rent out their CEOs and the CFOs. And all those,
all those fees are, are are going to be relative. So what I’m saying is that until you read the
prospectus, if you’re going to invest in a private in a public REIT, you know, that’s fair. Go
ahead, do that. But before you do that, you know, go find the the financial documents, the
prospectuses are their registration statements, if you’re in the US, and read the whole
document, it’s going to be painful, because it’s heavy, I would, I would fall asleep nation in
there that will drive you to understand whether or not it is a sound investment for your money.
And the risk level you’re prepared to take,

Marco Kozlowski: I would fall asleep instantaneously by reading those things.

Gabriel Araish: Well, yeah. But if that’s the case, then I suggest you don’t invest in them. Exactly. It’s it
wouldn’t make sense to invest something that you you don’t know what you’re investing in,
right? I mean, you’d have to understand what you’re investing in and pretend to say that I’m
investing in real estate because it’s a REIT is, in my opinion, it’s silly. It’s really not investing,
though, it’s the stuff it’s not really investing really well, I thought you’re speculating because
you don’t know what you’re investing,

Marco Kozlowski: right. But it’s more of a stock investment than as a real estate investment. It’s at the end of the

Gabriel Araish: well, yes, it is a stock investment, but it’s exposure to real estate, which is what most people
who invest in REITs are essentially that’s their, their, their mindset behind why they’re there
parking money in a REIT. So, if you want to diversify your portfolio, and you want to have
exposure to real estate, you can do it, this is one of the ways you can do it. The other way is
where I was going, which is the private investment or private real estate investment way, which
is more lucrative for an investor. But then, you know, there’s some of the things that REITs
offered at this doesn’t such as liquidity, or maybe you need to be an accredited investor in
some cases. So these are all things that depending on what your timeline for the return of
capital, and again, there’s a difference between someone who wants to invest $1,000 And
someone who’s investing 50 100 or $200,000 in a public REIT. So if you’re able to invest
$200,000 Presumably maybe you don’t need that money tomorrow morning and maybe going
down the private investment route might make more sense for you because the returns are
going to be more sound you get tax benefits directly to you via depreciation and Cost
Segregation so there’s there’s there’s just a lot more benefits to an investor from if you want to
be passive and investing in real estate there’s there’s a lot more advantages to going the
private investment way than the REITs and I think the best way of looking at it is if you start
looking up most of the wealthiest you know real estate investors in the world you know, I I
would doubt that you’d see anybody with with you know REITs in their portfolio most of them
will either be limited partners and in investments but most of them will actually be general
partners so they’re running and controlling the private investment in real estate and they are
raising money from other wealthy individuals that are you know, not interested in operating
they just want exposure and a good return on their money from the real estate industry they

Marco Kozlowski: own the rate that investing in the REIT

Gabriel Araish: well that yeah, I guess it’s not a REIT. It’s just a private investment firms. There’s it’s a different
structure. But yes, they basically in your words, they own the casino, they’re not exactly
investing in

Marco Kozlowski: what I own the casino. Exactly. Casino Exactly.

Gabriel Araish: But not everybody can own a casino and not everybody wants to so that’s fair. And some
people just like to go play in the casino. So if you’re gonna go play in the casino, you can either
play in the stock market which is pretty much as close to the definition of a casino as there is or
you can play in the private equity world. Yeah, casino where you have control a little bit more
over some of the variables or you understand them because there’s simpler and your returns
are going to be more sound in my opinion that’s where all the wealthy invest their money. And
that’s why I want to follow’

Marco Kozlowski: there you go. So to land the plane, the the only advantage that I see on a rate is easy and

Gabriel Araish: Yep, easy and easy out access to like if, if you’re not an accredited investor if you don’t meet
the low wealth criteria, although they’re looking to change this criteria to make it You know,
less based on wealth, but a lot of private equity REITs work on private equity firms and in real
less based on wealth, but a lot of private equity REITs work on private equity firms and in real
estate will work under a 506 C model, where you’re not allowed to take money from non
accredited investors. But there’s also the majority of them are actually 506 B. So they have 35
slots, that they can raise money from non accredited. So if that’s what you’re looking for, you
should look for those firms that are raising under a 506 b structure. And then obviously, you’re
gonna have to do your due diligence on the individuals on their track record on what they’re
investing in, because the beauty of it is just like public REITs, you know, different investment
firms will invest in different asset classes or real estate. So if you want to be exposed to
multifamily, you can go down that road and find a private equity investment in that world. If
you want to go down hospitality, you can go and find that private equity that invests in that,
just like REITs, there are REITs, for hospitality, there are weeds for multifamily, there’s some for
industrial, there’s some for storage facilities. So whatever you want to expose yourself to, you
can in both worlds, it’s just depends on, you know, make sure in both cases, you got to read the
documents, the document and the private world is a lot shorter and more concise than it is in
the public world. But either way, you need to know what you’re investing in and who you’re
investing in. And I would suggest that in the private equity world, it is more important to know
who you’re investing in. Because if that person doesn’t have integrity, or thinks of themselves
in their pocket first that can go sideways pretty quickly. But on the on the flip side of it is if you
find operators that operate with integrity, and that put the investments first and the investors
first Forgive me, then you know, you’re you’re most likely to get really healthy returns and, and
may want to you know, continue to go down that path.

Marco Kozlowski: Yep, sound advice and you you clearly know more about this than the average human being
and I’m really grateful that they were able to share this today. I’m gonna have to listen to this
podcast a few times to really grasp everything that you said. I’m not the smartest, smartest of
the village idiots. I think I’m the village idiot of the village idiots. And but yeah, it’s good chef.
Really good shit.

Gabriel Araish: I’ve just been exposed. Clearly. Regular, I had to read the Normans. It’s, yeah, I’m not doing
anything special. And I’m not any anyone special with respect to the knowledge. I just read a
lot of these prospectuses that most people refuse to lose to read. And, and you know, full
disclosure, the only reason I had to read them all is because I was paid

Marco Kozlowski: while you were a regulator. It is what your regulator as it is your expertise. That’s why you’re
here. So we appreciate you very much, Gabe very much. I would have loved to see Frank’s face
during this conversation as it were hilarious. And, and no, but it’s really good stuff. I appreciate
you very much. And as a listener, guys like us, love us, share us, comment below, make sure
you subscribe. And don’t don’t miss another episode of Big Fat real estate checks. Because if
you’re possibly if I was even thinking about doing or investing in a REIT, I would definitely do a
double take because there’s really, other than just literally being like a stock, I don’t really see
an advantage to it whatsoever. Because technically you’re not really exposed to the REIT to the
real estate. It’s really just the stock that you’re exposed to. That’s investing in that. It’s like, Do
I really have tech exposure? If I’m buying an apple, like Apple stock,

Gabriel Araish: it’s indirect exposure. It’s not direct. That’s I don’t learn

Marco Kozlowski: about tech. If I’m investing in Apple, it’s really you know, same thing anyway. We’re saying the
same thing just differently. So appreciate you guys very much appreciate you, Gabe. And yeah,
just think this information apply, use it, remember it and we’ll see you on the next episode of
Big Fat real estate checks. Thanks so much. Bye for now.