REIT vs REOC

Difference Between REIT vs REOC

The primary difference between REIT and REOC lies in the investment styles or patterns they adopt. REIT stands for Real Estate Investment Trust, and REOC refers to a Real Estate Operating Company. Both entities deal primarily in the real estate industry and allow people to invest their money in properties. One of the critical distinguishing features between a REIT and a REOC is that an REOC reinvests the money it earns back into the market and incurs higher corporate taxes. In contrast, REITs are a pool of investors' capital invested in real estate without managing, financing, or buying it themselves.

• REITs own, finance, and manage properties that generate income, like apartments, hotels, data or retail centers, warehouses, offices, etc.
• REOCs trade on an exchange and operate in the real estate market.
• The critical difference between a REIT and an REOC is that the latter reinvests the money it earns back into the market, pays higher corporate taxes, and has more significant growth than REITs.
• A large pool of investors looking to access the real estate market and diversify their portfolio tends to choose REITs and REOCs, but they should always research and understand the pros and cons of each type of firm.

Comparative Table

Particulars	REIT	REOC
Establishment	REITs were introduced much later than REOCs.	In the US, REOCs were first established in 1947.
Investment type	They may or may not be public-traded companies.	Reinvests the earned capital back into the market.
Income	75% of gross income must come from property investments and real estate activities.	Businesses and income outside the real estate industry are permitted.
Requirement	Minimum number of investors to qualify as a trust.	No such requirement is needed.
Shareholders' ownership	Five or fewer company shareholders own 50% of the shares, but not more than that.	No such shareholder's ownership is observed or imposed.
Dividends and profit sharing	90% of the taxable income must be paid as dividends and distributions.	It depends and comes from management and the board of members' decision-making.
Asset management	Cash, US treasuries, and real estate cover up to 75% of investments.	No such requirement is pursued.
Taxation	Double taxation is not imposed.	All the investments are subject to double taxation.
Active operations	Require 100 shareholders after the first year to remain active and operate as a REIT.	Again, no such obligation is imposed for company operations.

What Is REIT?

REITs are companies that provide large-scale investment opportunities to individual investors in the real estate industry by employing their money in income-generating properties. Further, the properties vary in size, nature, and type, including hotels, resorts, office buildings, apartments, condominium buildings, warehouses, etc. A REIT does not operate in developing and reselling properties but in utilizing them as an investment portfolio. The individual investors earn a share of the commercial property ownership without purchasing it.

Retail investors can invest in a REIT by trading them as stocks on significant stock exchanges. At the same time, there are also REIT mutual funds and REIT exchange-traded funds. Such a company does not always need to trade in the stock market, but they all register with the US Securities and Exchange Commission.

Thus, there are three types of REIT companies operate in the market:

• Equity REIT: Such companies earn through rent from properties.
• Mortgage REIT: These companies operate in mortgage-backed securities, lending money to property owners and earning through interest and loan payments.
• Hybrid REIT: It is the amalgamation of both equity and mortgage-based REITs.

Investors prefer investing in REITs due to the numerous benefits they offer, such as the lack of liquidity. They find this feature extremely valuable since REITs are illiquid assets, making it difficult for them to sell quickly in the market. The distribution of profits is more frequent in non-trading REITs, and they may use borrowed funds. The REITs' total return performance has outperformed the S&P 500 Index and other indices in the last two decades. Thus, it shows that investing in such firms can help anyone beat inflation.

As of 2022, information shows that REITs own over half a million distinct properties. Any investor, with the help of a broker, buys common, preferred stocks or debt securities of the REITs listed on the stock exchange, for which the broker charges a fee. Thus, a financial advisor can sell you non-traded REITs with higher fees, amounting to up to 9% of the investment, including the offering and sales commission.

What Is REOC?

Real Estate Operating Companies (REOCs) actively operate within the real estate industry, participating in all aspects of buying, developing, managing, and financing real estate properties and projects. They don't have to pay dividends, so they use their earnings to reinvest in the market and make substantial profits over time. As per the business model and management, REOCs can operate in business segments and industries other than the real estate sector.

There are fewer restrictions and higher flexibility in the REOCs, and they can buy the land and wait patiently for the right time to arrive to choose to lease or sell it. Hilton Hotels was the first real estate operating company in the USA to establish a real estate investment trust. These firms purchase high-risk and costly properties, such as shopping malls, apartment buildings, and large residential complexes, renowned for their acquisitions.

In recent times, Grosvenor, Crow Holdings, and Davis Companies are other good REOC examples operating in the United States. For anyone new to investing and finance and looking to create assets and multiple income streams, REOCs and REITs are some of the best options. Depending on the long-term objective of an investor depends on whether they should invest in a REIT or REOC.

Similarities

Though REIT and REOC have a lot of differences between them, they also share some similarities. Let us explore them below:

• Both are legal entities operating as companies in the real estate industry.
• REITs and REOCs share a long-term history of good returns for investors and outperforming the market.
• Both types of firms are publicly traded companies registered with the SEC.
• REIT and REOC offer the ability to diversify investments, accessibility to property and land ownership, and capital appreciation.

Recommended Articles

This article has been a guide to REIT vs REOC. We explain the differences and similarities between the two with their definitions and a comparative table. You may also find some useful articles here –

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