Admin

REIG vs REIT: A Complete Guide

By
Services for Real Estate Pros with Kukun, Inc.

If you’re into real estate investment, you’ve likely come across the terms REITs (Real Estate Investment Trusts) and REIGs (Real Estate Investment Groups). Both are popular options to invest in real estate. However, understanding REIG vs REIT is crucial if you want to make informed investment decisions. 

Remember that both differ in ways that can affect your investment and returns. In this blog, we’ll help you understand both concepts and also the key differences between REITs and REIGs.

 

What is REIT?

REIT, or Real Estate Investment Trust, is an organization that owns, operates, or finances income-producing real estate. Furthermore, it functions as an association, trust, or corporation that pools investors’ funds to acquire and manage a portfolio of real estate assets.

REITs offer a way for individual investors to earn a share of the income produced through commercial real estate ownership without having to buy, manage, or finance any properties themselves. They are accessible to individual investors who can buy REIT stocks and share in the profits.

There are three main types of REITs.

 
  1. Equity REITs: They invest in real properties, such as residential and commercial real estate. The source of income is from rents, leases, and property sales.
  2. Mortgage REITs: These invest in mortgage-backed securities or directly lend mortgages to developers, homeowners, and buyers.
  3. Hybrid REITs: These invest in both physical properties and mortgage-backed securities.

What are the pros and cons of REITs?

Pros of REITs

  • You can easily invest in REIT by buying its stocks, often with relatively low capital.
  • REITs help in portfolio diversification. You can invest in various real estate properties, which helps spread out the risks.
  • You can expect competitive returns. REITs must pay out at least 90% of their taxable income as dividends, providing good returns.
  • REITs are a good source of passive income through dividends.
  • REIT stocks can be bought and sold quickly on stock exchanges. And, offer quick liquidity.

Cons of REITs

  • Dividends are taxable.
  • Private REITs can have high fees.
  • Changes in mortgage rates and real estate markets can affect income.
  • Investors have little say in how the REIT is managed.

What is REIG?

An REIG invests in real estate assets – either by developing new properties or buying stakes in existing ones. They also manage and maintain properties for a fee. They can invest in mortgage-backed securities or lend directly to buyers and developers. Keep in mind that REIGs usually operate as partnerships with private shareholders. Moreover, they require larger capital investments. And, allow investors to participate more directly in decisions. 

What are the pros and cons of REIGs?

sweat equity

Pros of REIGs

  • Like REITs, REIGs invest in various properties, diversifying your portfolio.
  • REIGs can also invest in other industries, further diversifying investments.
  • REIGs can generate competitive returns on investments (ROI).

Cons of REIGs

  • They often require significant initial investments. They mostly cater to high-net-worth individuals.
  • Membership and management fees can be substantial which can affect profits.
  • REIG investments can be less liquid, making it harder to access your funds quickly.

REIG vs REIT: What’s the difference?

REIGs and REITs are both ways to invest in real estate but they work very differently. REIGs pool money from investors to buy properties. But, they require a longer commitment and often a higher initial investment. Furthermore, they’re less regulated and less liquid, meaning it can take time to get your money out.

On the other hand, REITs are companies that own or finance real estate and are usually traded on stock exchanges. And, REITs are highly regulated. Moreover, by law, they must disclose their financials, and pay out 90% of their profits as dividends. They offer more liquidity.

Here’s a breakdown of what REIG vs REIT entails.

Aspect REIG REIT
Ownership Structure Typically, a small group of investors pool their money to invest in real estate properties collectively. Operates like a publicly traded company with shares owned by individual investors who buy and sell on public exchanges.
Management Investors often have a more hands-on approach to property management decisions and operations. Professional executives handle property management, leasing, and strategic decisions on behalf of shareholders.
Accessibility Generally, it requires lower capital compared to purchasing individual properties. Allows investors to participate in real estate without directly owning or managing properties.
Liquidity Typically less liquid than REITs. Offers higher liquidity as shares can be bought and sold on stock exchanges.
Regulation Less regulated than REITs, with fewer formal requirements. Subject to stringent regulatory requirements, including distribution of a significant portion of income as dividends and compliance with specific operational and financial standards.
Income Distribution Income and profits are typically distributed among group members according to agreed-upon terms. They are required by law to distribute at least 90% of taxable income to shareholders as dividends.

How do I join REIG or REIT?

Joining REIG involves finding a group of investors interested in pooling money to invest in real estate. This can be through networking in local real estate groups, online forums, or referrals. Once you find potential members, you can establish the group’s structure and goals, often forming a partnership or LLC. 

Members usually contribute funds to the group, which they use to purchase properties or real estate assets based on the group’s investment strategy. Remember that participation in decision-making and property management responsibilities can vary depending on the group’s agreements.

Joining REIT is simpler. REITs are publicly traded companies. They own or finance income-producing real estate. To invest, you need to open a brokerage account and buy REIT shares on major stock exchanges such as NYSE or NASDAQ. It’s best to research different REITs to find ones that fit your financial goals.

Key takeaway 

While both REIGs and REITs provide opportunities to invest in real estate without direct property ownership, or without the direct responsibilities of property management, they differ in the way they work. 

Each investment option appeals to different types of investors based on their preferences for involvement, capital availability, risk tolerance, and investment goals. REITs may be ideal for smaller investors or those seeking less management responsibility. In contrast, REIGs provide direct involvement, potentially higher returns, and broader investment opportunities. But, require significant capital and come with higher fees and less liquidity. Understanding these differences will help you optimize your real estate investment strategy.

FAQs

What’s the difference between REIT and REIC?

A REIT is like a company that owns and manages real estate properties. And, it’s traded on stock exchanges. On the other hand, REIC (Real Estate Investment Company) can refer to any company involved in real estate investment. But, it may not necessarily be publicly traded like REITs.

What are the benefits of joining REIG?

Joining REIG allows investors to participate in real estate investments with lower capital requirements than buying properties individually. It also provides opportunities for portfolio diversification and shared expertise among group members.

What are the risks of REIGs?

Risks include potential disagreements among members, varying levels of involvement in decision-making, and the impact of the real estate market on investment returns.

How are REITs different from other real estate investments?

Unlike direct property ownership, investing in REITs involves buying shares. This provides liquidity and allows for diversified real estate investment without managing properties directly.

What are the benefits of investing in REITs?

Investing in REITs offers the potential for regular income through dividends. Moreover, it offers diversification across different real estate sectors, liquidity through stock market trading, and professional management of properties.

What are the risks of investing in REITs?

Risks include fluctuations in real estate market conditions. These can affect property values and rental income. Moreover, interest rate changes impact financing costs. Plus, there may be specific risks associated with different property types or geographic locations.