An investor told me last year that he already had his real estate exposure covered. He owned a REIT in his brokerage account. Then the market sold off, and he watched it fall right alongside his stocks. Some months it fell harder.
He came back with a fair question. If it drops when the market drops, what did I actually buy?
That's the right question, and almost nobody asks it before they buy. A REIT is a fine instrument. It just isn't what most people think it is. It's a stock that happens to own buildings, and it behaves like a stock. If you went looking for real estate to diversify away from your portfolio, a REIT hands you back the same portfolio in a different wrapper.
TL;DR
- A publicly traded REIT is a stock. It's liquid, it's easy to buy, and it moves with market sentiment, not with the buildings it owns.
- That's the catch for anyone buying real estate to diversify. A REIT correlates to the same market you were trying to get away from.
- A private real estate debt position is the other direction: income first, illiquid, backed by a specific property with the owner's equity sitting underneath you.
- The tradeoff is real. You give up daily liquidity and the home-run ceiling. You get income that doesn't reprice every time the market has a bad afternoon.
- This isn't a knock on REITs. It's a clarification of what you're actually buying on each side.
What you actually own when you own a REIT
Start with what a REIT is, in plain terms. You buy shares of a company that owns real estate. Those shares sit in your brokerage account next to your stocks, and they price the same way your stocks do: second by second, on whatever the market is feeling that day.
That's the appeal. You can buy it in a click and sell it Tuesday afternoon. Liquidity is a real feature and worth something.
But price it the way the market prices it and you inherit how the market behaves. When sentiment turns, REITs get sold with everything else, sometimes first, because they're an easy line to trim. The building didn't change. The rent roll didn't change. The share price fell because the market fell.
So the honest label on a REIT is this. It's equity, it's liquid, and it's volatile. You own a slice of a company, last in line behind that company's debt, and you're marked to the market's mood every day. For a lot of goals that's fine. For the specific goal of owning real estate that behaves like real estate, it's the wrong tool.
Why "real estate exposure" through a REIT often isn't diversification
Here's where the busy professional gets tripped up. You hold a stock portfolio. You want to spread risk into real estate. So you buy the thing with "real estate" in the name.
The problem is correlation. If the new position rises and falls in step with what you already own, you didn't diversify. You concentrated. You bought more of the same risk with a different label on it.
A REIT trades on the same exchanges, gets bought by the same funds, and reacts to the same rate headlines as the rest of your holdings. In a calm year you might not notice. In a selloff you notice fast, because the piece that was supposed to zig is zagging right along with everything else. That's not a flaw in REITs. It's just what a publicly traded security does.
What a private real estate debt position is instead
Now the other seat. Instead of owning equity in a company that owns buildings, you lend against a specific building and get paid interest for it.
A real estate debt fund pools investor capital and makes loans secured by property. You're not the owner. You're the lender. The borrower pays interest, and that interest is your income. The fund holds a first-position lien, which means if a project goes sideways and the property sells, the loan gets paid before the owner sees a dollar.
Three things make this behave differently from a REIT.
It's income, not a bet on price. Your return comes from loan payments, not from what the market decides the shares are worth today. There's no ticker to refresh.
It's backed by a specific property with a cushion beneath you. On the loans behind this kind of fund, the loan is capped at 70 percent of a property's after-repair value. The owner's roughly 30 percent equity sits under the loan and takes the first loss. The property has to fall through that entire cushion before it reaches your principal.
And it's illiquid, on purpose. You can't sell it Tuesday afternoon, and that's the trade. You give up the button-click exit and in return you're not chained to the market's daily mood. Money that isn't marked to sentiment every day doesn't get whipsawed by it.
The honest tradeoff, both directions
None of this is free, so let's name what you give up.
You give up liquidity. A REIT you can sell in a click. A debt position you can't. If you might need that exact dollar next month, the REIT wins.
You give up the ceiling. When real estate runs hot, the equity owner makes more than the lender ever will. Debt trades the home run for getting paid first. If you're swinging for maximum upside, the lender's seat will feel slow.
And a private fund is for accredited investors. It's a relationship, not an app. Where this kind of fund is open, the minimum is 100,000 dollars, the target return is 11 percent, and it's a target, never a guarantee. Distributions are paid quarterly, on a 12-month term. The manager invests alongside the investors on the same terms, with no promote and no spread skimmed off the top.
So it isn't "debt beats REITs." It's knowing what each one is. A REIT is liquid equity that moves with the market. A secured debt position is illiquid income that's tied to a property instead of a mood. If what you wanted was real estate that behaves like real estate, that's the difference that matters.
Which one you actually wanted
Go back to the investor in his brokerage account. He didn't want a second stock. He wanted the part of real estate that made him want in: steady income, backed by something real, that doesn't move in lockstep with the market he was trying to diversify away from.
A REIT couldn't give him that, because a REIT is a stock. The alternative could, as long as he was willing to trade daily liquidity and the home-run ceiling for income and protection. That's the whole decision. Not which one is better. Which one you were actually trying to buy.
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About Ed Mathews
Ed is the founder of Clark St Capital, Clark St Homes and Elevista. He started investing in 2011 after analyzing deal after deal and making zero offers, until a mentor handed him a pen and made him sign his first contract. Since then, Clark St has operated across single-family, multifamily and land development, with Ed also invested as a limited partner in funds and large multifamily projects. Ed also spent more than two decades in Silicon Valley building systems for global companies. He hosts the Real Estate Underground podcast, with new episodes every Tuesday at 12pm.
