Not everyone is happy about the impact REITs have on our market. Some investors complain they can't compete effectively because REITs enjoy such a low cost of capital. Most of the capital they use to buy apartments comes from selling stock. Since REIT stock investors are content with dividends below 6 percent today, REITs enjoy cheap money. Even today's relatively low mortgage rates are a much more expensive source of capital for private investors.
Unfair competition is the name of the game in real estate.
Most investors want it that way, usually thinking they know something nobody else knows. On top of that, there have regularly been imbalances in the market, with one type of investor enjoying benefits others can only envy. Tax shelter syndication dominated our market in the early 1980s. Their tax-driven investing beat out other types of investors, particularly those who did not need, or could not use the tax benefits, such as pension funds. Once the tax shelter days ended, pension funds, with a low cost of capital pegged to pension benefit needs, outbid most other investors who relied on a large amount of 9 or 10 percent financing to buy apartments.