Advertiser Disclosure

advertising disclaimer
Skip to main content
REIT cubed spelling gold and white

What Is an Internally Managed REIT?

When a REIT manages its own assets with an internal employee, it's considered an internally managed REIT.

[Updated: Feb 04, 2021] Oct 21, 2019 by Millionacres Staff
FREE - Guide To Real Estate Investing

Take the first step towards building real wealth by signing up for our comprehensive guide to real estate investing.

*By submitting your email you consent to us keeping you informed about updates to our website and about other products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Statement and Terms & Conditions.

An internally managed REIT is a real estate investment trust that employs the investment managers and support staff that manage the operations of the company day-to-day. In other words, the REIT manages its own portfolio, rather than outsourcing that task to an external management team.

How internal REIT management evolved

The first REITs ever developed were externally managed, following a convention borrowed from the private equity industry. Since then, the vast majority of U.S. REITs have shifted to an internal-management model. In fact, the rise of internally managed REITs has more to do with the disadvantages of an external manager than anything else.

Over time, REIT shareholders have found that the interests of external REIT managers did not always align with their own priorities. Managers often focused on maximizing their own fees rather than driving long-term shareholder value. The conflicts of interest were compounded because external managers may have been working with numerous other REITs, an arrangement that limited their time to focus on any one REIT.

In response, many REITs brought management in-house. By making the managers employees, the REIT is better able to align the company's day-to-day decision-making with long-term shareholder priorities. At the same time, the management team is tasked with managing a single portfolio, rather than juggling the needs of numerous, separate REITs.

Disadvantages of internally managed REITs

The shift from external management to internal management wasn't without sacrifice. A study by Fitch Ratings, for example, found that externally managed funds tended to have lower administrative costs than those managed internally. The difference was about 20 basis points, adjusted for market value. That seems small at first blush; however, it can work out to a substantial amount of cash at large REITs over extended time periods.

Likewise, external managers are also more likely to have the scale to support larger and more-capable teams of investment and support professionals. This can be significant for smaller REITs that lack the assets to justify large expenditures on human resources

For most REITs today, however, these sacrifices were necessary to eliminate the larger problems of corporate governance and conflicts of interest inherent to the external-management model.

Unfair Advantages: How Real Estate Became a Billionaire Factory

You probably know that real estate has long been the playground for the rich and well connected, and that according to recently published data it’s also been the best performing investment in modern history. And with a set of unfair advantages that are completely unheard of with other investments, it’s no surprise why.

But those barriers have come crashing down - and now it’s possible to build REAL wealth through real estate at a fraction of what it used to cost, meaning the unfair advantages are now available to individuals like you.

To get started, we’ve assembled a comprehensive guide that outlines everything you need to know about investing in real estate - and have made it available for FREE today. Simply click here to learn more and access your complimentary copy.