REITs vs. Residential Real Estate

REITs and residential properties are both in the real estate sector, but the similarities end there.

When investors invest in residential property, they often intend to flip the property within a few months, which can be very risky, tax-inefficient and will not yield long-term profits.

REIT's generally invest in commercial real estate, where investing decisions are thought over very carefully and the real estate property is bought with the intention to hold for several years to rent out to long-term tenants. 

REIT's are businesses and are focused on creating profits for investors, and when they don't perform they are not only losing their own money, but the capital of thousands of investors.  As a result, REITs limit speculation and tend to invest in more stable properties with promising futures.  Speculation is often left for the individual investor.

Although REITs are historically not very risky, they are not perfectly insulated investments.  When the housing market weakens, consumer spending declines and business do not need to expand.  When businesses do not need to expand, they will decrease their spending on office space, which will negatively affect REITs.

Another risk is being exposed to overbuilding, which drives down rents and hurts profitability.  When too much space is bought with not enough tenants to rent, the low amount of rent may not cover mortgage payments and administration costs.  This will considerably dip into profits.  On the contrary, 100% occupancy could mean the REIT is not managing their rent rate appropriately and need to raise the rent.