How REITs Play a Role in Real Estate Development

So we’ve talked a lot about investing in REITs as a way to earn passive income. But have you ever wondered what happens on the other side? Like, how do these buildings actually get built, and what role do REITs play in making that happen? Chapter 10 of Mike Hartley’s book breaks this down, and it’s pretty interesting stuff.

How Real Estate Development Actually Works

Before we get into the REIT side of things, let’s walk through how a real estate project goes from an idea to a building you can walk into.

Step 1: Acquisition. Someone finds a piece of land or an existing property worth developing. This involves research on the location, zoning laws, market demand, and whether the numbers make sense. It’s basically due diligence before you commit any real money.

Step 2: Financing. You need money. A lot of it. Developers rarely fund entire projects out of pocket. They put together financing from banks, investors, and sometimes REITs. This is where the capital stack comes together, and it’s the part that makes or breaks most projects.

Step 3: Design and planning. Architects and planners get involved. You need blueprints, permits, environmental assessments, and community approvals. This stage takes longer than most people expect. Months, sometimes years, depending on the project size and local regulations.

Step 4: Construction. The actual building part. Managing contractors, staying on budget, hitting timelines. Easier said than done.

Step 5: Selling or leasing. Once it’s built, you either sell units or start leasing space. This is where the project finally starts generating revenue.

Where REITs Come In

REITs participate in development primarily as capital providers. They have access to large pools of money from their investors, and they can deploy that capital into development projects. Here’s what they bring to the table.

Financial backing. This is the obvious one. REITs can fund projects that individual developers might struggle to finance on their own. Having a REIT as a financial partner means you’re working with serious money and institutional credibility, which also makes it easier to get additional financing from banks.

Industry expertise. REITs aren’t just writing checks. They’ve managed hundreds or thousands of properties. They know what works and what doesn’t. They understand market cycles, tenant preferences, and operational efficiency. That knowledge is valuable when you’re planning a new development.

Innovation and sustainability. Some REITs are pushing for eco-friendly technology in new developments. Green buildings, energy-efficient systems, sustainable materials. This isn’t just about being nice to the planet. It’s also about lower operating costs and attracting tenants who care about sustainability.

Urban revival. REITs have the capital to take on projects in neighborhoods that need investment. Redeveloping old industrial areas, revitalizing downtown districts, or converting unused office buildings into residential space. These projects can genuinely improve communities.

The Downsides of REIT Involvement

It’s not all great, though. Hartley is honest about the drawbacks.

Bureaucracy. REITs are big organizations with boards, shareholders, and compliance requirements. Decision-making can be slow. If you’re a developer who needs to move fast, having a REIT partner might feel frustrating.

Loss of creative control. When a REIT is funding your project, they get a say in how things are done. Your vision for the building might clash with their priorities, which are usually focused on maximizing returns for shareholders. You might end up with a more cookie-cutter result than you wanted.

Risk of overdevelopment. This is a real concern. REITs are under pressure to grow and deliver returns. Sometimes that means building more than the market actually needs. Overdevelopment leads to high vacancy rates, which hurts everyone involved. We’ve seen this play out in some office markets where too much supply was built right before demand shifted.

Alternative Ways to Fund Real Estate

REITs aren’t the only option for funding real estate projects. Hartley covers several alternatives that are worth knowing about, especially since some of these are accessible to regular investors.

Real estate crowdfunding has become a big deal. Platforms like Fundrise, RealtyMogul, and CrowdStreet let everyday investors pool their money to fund real estate projects. You can invest with relatively small amounts and get exposure to commercial real estate without buying an entire building. The trade-off is that these investments are usually less liquid than public REITs. You might be locked in for years.

Seller financing is when the property seller acts as the lender. Instead of going to a bank, you make payments directly to the seller over time. This can work when traditional financing is hard to get, and terms are negotiable between buyer and seller.

Private lending involves borrowing from individuals or private funds instead of banks. Interest rates are usually higher, but the approval process is faster and more flexible. Hard money lenders fall into this category too.

Home equity loans and HELOCs let you borrow against equity in property you already own. If you’ve built up equity in your home, you could use it to fund a real estate investment. Just be careful because you’re putting your home on the line.

Real estate partnerships are when two or more people combine resources to buy property together. One person might bring the money while another brings the expertise. These can work well but require clear agreements about responsibilities and profit-sharing.

Angel investors and venture capital are more common in tech, but some investors focus on real estate ventures, especially ones involving technology or innovative business models.

Government grants and programs exist in some areas to encourage development, especially affordable housing or projects in underserved communities. These vary widely by location but can provide meaningful financial support.

Why This Matters For REIT Investors

Even if you’re just buying REIT shares and not developing property yourself, understanding this side of the business matters. When you invest in a REIT that does development, you’re betting on their ability to execute these projects successfully. Knowing the process helps you evaluate whether a REIT’s development pipeline is realistic or overly ambitious.

It also helps you understand why some REITs perform better than others. The ones with strong development track records, good relationships with local governments, and disciplined approaches to new projects tend to create more value over time.

And if you ever want to get more hands-on with real estate investing, whether through crowdfunding or direct partnerships, knowing these alternative funding options gives you a starting point.

Next up, we’re tackling everyone’s favorite topic: taxes. Specifically, how REIT dividends are taxed and how REITs fit into estate planning.

This is part of a series retelling Mike Hartley’s “Real Estate Investment Trust Investing: The Secret to Passive Income from REITs.” For the full picture, I recommend reading the book yourself.