Why the Wealthy Avoid Real Estate Investment Funds (And Why You Shouldn't)

Why the Wealthy Avoid Real Estate Investment Funds (And Why You Shouldn't)

The Liquidity Limitation

One of the key reasons the ultra-wealthy tend to avoid real estate investment funds (REITs) is the issue of liquidity. When you have billions of dollars to invest, you need the ability to quickly move large sums of money in and out of positions as opportunities arise. The liquidity of most REITs simply can't accommodate the trading needs of high-net-worth individuals and institutions.

Let's look at an example. The TRXF11 REIT has a daily trading volume of R$8.3 million. That may sound like a lot, but for someone like Luiz Barce, who can easily move R$12 million into a single stock position in 30 seconds, that liquidity is far too low. In fact, it's recommended to only consider 20-30% of a REIT's stated daily volume as the true usable liquidity. So the R$8.3 million for TRXF11 really translates to only around R$2 million that could realistically be traded without significantly impacting the price.

Compare that to the liquidity of some individual stocks. Banco do Brasil, for example, has a daily volume of R$516 million - over 60 times more than TRXF11. Caixa Seguridade, another major Luiz Barce holding, trades R$48 million per day. The sheer scale of capital these high-net-worth investors manage requires a level of liquidity that most REITs simply can't provide.

The 10% Ownership Limit

Another key factor that deters the wealthy from investing in REITs is the 10% ownership limit. Brazilian tax law states that if an individual investor owns more than 10% of a REIT, their dividends will be taxed at 20% rather than the typical REIT exemption.

For someone like Luiz Barce, who has billions to invest, a 10% stake in all but the largest REITs would be easily achievable. But he wants to maintain control and influence over the companies he invests in - something that's difficult to do with a minority ownership position. By investing directly in stocks like Unipar, where he owns 14.2% of the company, Luiz Barce can have a much greater say in the strategic direction and decision-making.

The 10% ownership limit essentially prices the ultra-wealthy out of the REIT market, as they would face significantly higher taxes on their investment returns compared to direct stock ownership. For the average investor, this limit is not nearly as restrictive, but for those with vast sums of capital, it's a major deterrent.

The Need for Control

Beyond just the tax and liquidity considerations, the wealthy also tend to avoid REITs because they prefer to maintain direct control over their real estate investments. When you own individual properties or stakes in operating companies, you can make decisions about things like tenant selection, renovations, and property sales. With a REIT, that control is ceded to the fund managers.

Luiz Barce, for example, has explicitly stated that he likes to have a seat on the board of directors for the companies he invests in. This allows him to directly influence the strategic decisions that impact his capital. With a REIT, he would be just one of potentially hundreds or thousands of investors, with little ability to sway the fund's operations.

For the average investor, relinquishing some control in exchange for the diversification and professional management of a REIT is often an acceptable trade-off. But for the ultra-wealthy, maintaining that level of control over their investments is a key priority. They want to be the ones calling the shots, not deferring to a fund manager.

Dividends vs. Capital Appreciation

The final factor that makes REITs less appealing to the wealthy is the focus on dividend income rather than capital appreciation. REITs are structured to provide steady, reliable monthly or quarterly dividend payments. This makes them well-suited for investors seeking a reliable passive income stream, like retirees or those looking to supplement their earnings.

However, for the ultra-wealthy, dividends are often less important than the potential for capital growth. Investors like Luiz Barce are more focused on building wealth through stock price appreciation than generating consistent dividend income. They have the luxury of not needing to rely on their investments for day-to-day living expenses, so they can afford to be more aggressive in their asset allocation.

Additionally, the dividend income from REITs can be less stable than one might expect. Companies like Unipar, one of Luiz Barce's largest holdings, have seen their dividend yields fluctuate significantly from year to year based on commodity prices and other market conditions. For someone counting on that income to fund their lifestyle, that volatility could be problematic. But for the wealthy investor, it's less of a concern.

The Importance of REITs for the Average Investor

While the ultra-wealthy may have good reasons to avoid REITs, for the average investor, they can be an incredibly valuable tool for building wealth and generating passive income. Here are a few key reasons why REITs should be a core part of most investment portfolios:

• Steady Dividend Income: REITs are required by law to distribute at least 95% of their taxable income as dividends to shareholders. This provides a reliable, tax-efficient source of passive income that can be particularly helpful for retirees or those looking to supplement their earnings.
• Diversification: REITs provide exposure to the real estate asset class, which can help diversify a portfolio that may be heavily weighted towards stocks and bonds. This can help reduce overall portfolio volatility.
• Professional Management: Investing in a REIT allows you to benefit from the expertise of experienced real estate investment professionals, who handle all the day-to-day property management tasks.
• Lower Barriers to Entry: Buying shares of a REIT is much more accessible than directly purchasing and managing investment properties, making real estate investing available to a wider range of investors.

Of course, as with any investment, it's important to do your due diligence and carefully research the specific REITs you're considering. Not all REITs are created equal, and there are certainly some that are better managed and positioned for long-term success than others.

That's why we recommend taking the time to learn how to properly analyze and evaluate REIT investments. Our Mentoria Geração Dividendos program is designed to teach you the skills and knowledge you need to become a savvy REIT investor. With over 120 in-depth lessons and monthly live Q&A sessions, you'll be able to confidently navigate the REIT market and build a portfolio that aligns with your financial goals.

And if you're just getting started with investing, be sure to check out our Método 2em1 course, which covers the fundamentals of building a diversified investment strategy that includes both stocks and REITs.

Remember, while the ultra-wealthy may have their reasons for avoiding REITs, for the average investor, they can be a powerful tool for generating reliable passive income and building long-term wealth. With the right knowledge and approach, REITs can be a game-changer for your financial future.

Conclusion

In summary, the key reasons the ultra-wealthy tend to avoid real estate investment funds (REITs) are:

• Liquidity Limitations: REITs generally lack the trading volume and market depth to accommodate the large-scale investment needs of high-net-worth individuals and institutions.
• 10% Ownership Limit: If an investor owns more than 10% of a REIT, their dividends are taxed at a higher rate, which is a significant deterrent for the wealthy.
• Desire for Control: The wealthy prefer to maintain direct control over their real estate investments, which is difficult to achieve with a REIT structure.
• Focus on Capital Appreciation: The wealthy are often more interested in building wealth through stock price appreciation than generating consistent dividend income.

However, for the average investor, REITs can be an incredibly valuable tool for building wealth and generating passive income. By providing steady dividend payments, diversification, and professional management, REITs can be a game-changer for those looking to secure their financial future.

To learn more about how to become a successful REIT investor, be sure to check out our Mentoria Geração Dividendos program and our Método 2em1 course. With the right knowledge and approach, you can harness the power of REITs to achieve your financial goals, even if the ultra-wealthy choose to avoid them.