Know What You Own: REITs and Tech Startups

I want to understand the asset before I buy it. That applies whether I am looking at a real estate investment trust or an early-stage technology company. Both can be attractive to the right investor, but the risks and the knowledge needed to evaluate them are different.

REITs: easy to own, still need to be understood

A viewer asked about real estate and the idea that owning it takes away your freedom. For someone who wants exposure to brick-and-mortar real estate as a passive investor, a REIT is one route. At the time I owned two REITs and was optimistic about them. I also owned actual property, and I said there is nothing wrong with that.

A REIT, or real estate investment trust, is a company that owns or finances income-producing real estate and can distribute income to its shareholders. Put generically, it is like a stock that owns various real estate assets: office space, shopping malls, facilities that house servers. It collects rents and pays out a distribution. To qualify as a REIT, a company has to distribute at least 90 percent of its taxable income to shareholders each year, according to the SEC's investor bulletin.

Most people would not know what a REIT is, and not because they are dumb. It is a nuanced thing. Even for people who do, you cannot buy REITs indiscriminately. You have to understand both sides: how markets work in general, and how real estate works, including what makes the real estate or the business model more or less valuable. That is complex to get a good grip on.

My view in 2020 was that this was a stock-picker's market. I believed an investor who could identify strong, underappreciated REITs might do better than buying an index or ETF that also held weaker trusts. In turmoil, that distinction mattered to me. That advantage belongs only to someone who can actually tell which is which. I came back to REITs in 2023, when I told viewers to study the specific trust, its assets, management, debt and price; I wrote that up in why reading financial statements comes first. I describe how real estate fits with businesses and stocks in entrepreneurship, stocks and real estate.

Tech startups: expertise, access and long odds

Another viewer asked what I thought of investing in tech startups. My answer was that it takes a lot of subject-matter expertise.

I know people who invest in early-stage technology companies and understand that field far better than I do. Even expertise does not remove the possibility of losing an entire investment. The strategy depends on judging many uncertain businesses over a long time horizon.

The good news is that "you only need one" big win. Entrepreneurship works the same way: you can make many mistakes, and if your successes are larger than your failures, you can still come out well. It is not a game of perfection. Someone who built a business that made a lot of money for a period and then watched it fall out of favor is not a failure. That person is an entrepreneur. Even a company that later becomes very successful can have substantial ups and downs along the way.

If I invested in a startup, it would need to be something I understood extremely well and a business to which I could contribute. Strong startups may choose investors who bring more than capital, such as specific knowledge or a strategic relationship. Having money alone does not guarantee access to those deals.

It is not a get-rich-quick plan. It takes a lot of knowledge, the right place and time, the right idea and the right team. You have to know things other people don't, be willing to do things other people won't, and have a high-quality team around you, because nobody builds a company like Apple or Facebook alone.