What is a real estate operating company (REOC)?
A real estate operating company (REOC) is a publicly traded company that actively invests in
properties – generally commercial real estate. Unlike real estate investment trusts (REITs), REOCs reinvest the money they earn in your business and are subject to higher corporate taxes than REITs.
- A real estate operating company (REOC) is a real estate investor and is listed on a public stock exchange.
- REOCs can reinvest their earnings in the business instead of distributing them to shareholders in the same way that REITs are required to do so.
- REOCs have the potential to have greater growth prospects than REITs, but may not generate as much immediate revenue.
Understanding Real Estate Operating Companies (REOC)
Investors have several options if they want to diversify their holdings and add real estate to their portfolios. Buying real estate is an option, but it can come at great cost and immense risk. Investors who buy properties (residential and / or commercial real estate) must be able to bear the financial burden of buying and holding properties in addition to the risks and uncertainties that come with the housing market.
REOCs can protect investors from some of the risks associated with owning real estate. Owning a few shares in one of these companies gives you immediate exposure to several different types of real estate that have been carefully selected and then managed by a team of experts.
Most of its interests are commercial properties such as retail stores, hotels, office buildings, shopping centers, and multi-family homes. Many REOCs also invest and manage properties. For example, a business may sell or lease units of a multi-family home or office building to different people, but still maintain and earn money in common spaces such as parking lots and lobbies.
REOC shares are traded on exchanges like any other publicly traded company. Investors can buy stocks through their broker or other financial professional. Although they eliminate the risk of owning physical properties, REOCs are subject to certain market risks, including interest rate risk, housing market risks, liquidity risk, and credit risk.
REOCs pay federal taxes because they are not required to distribute their profits to shareholders.
REOC vs. REIT
Although both invest in real estate, there are functional and strategic differences between REOCs and REITs. REITs own and operate properties that generate income through rentals or leases. They can be residential homes, hotels, and even infrastructure properties like pipelines and cell phone towers. Investors can choose to buy shares in three different types of REITs: Equity REITs, Mortgage REITs, and Hybrid REITs.
REOCs are structured in a way that allows them to reinvest their earnings in the company rather than distribute them to shareholders. As such, they can expand their properties by purchasing new properties or return money to existing properties to improve them. They can also use the proceeds to buy new properties for the express purpose of selling them again at a later date. Being able to reinvest your earnings means that REOCs do not receive favorable tax treatment, thus paying higher taxes than REITs.
To qualify as a REIT, companies must meet certain requirements. These include, but are not limited to, investing a minimum of 75% of your assets in real estate and distributing at least 90% of your earnings to shareholders. In return, REITs get favorable tax treatment. Corporate taxes for REITs are much lower than taxes for REOCs because they are exempt from federal taxes.
REITs tend to invest and buy properties that limit the amount of risk associated with certain commercial properties due to the special tax status they enjoy. Your investment strategies tend to be long-term. This means that REITs do not buy investment properties to sell in the future in the same way that some REOCs do.