Planning for a comfortable retirement begins with smart investment choices. From stocks and bonds to commodities, there are countless options available for the modern-day investor, depending on their risk appetite and investment goals. Real Estate Investment Trusts (REITs) is a lesser-known such investment product with the potential to provide you with a high return in the long term.
Today, 80% of registered investment advisors recommend REITs to clients. But is it the right investment choice for you? Let’s find out.
What are Real Estate Investment Trusts?
REITs are companies that own or invest in a portfolio of income-generating real estate assets, such as shopping malls, hotels, and warehousing facilities. And they comply with various criteria to qualify as a Real Estate Investment Trust.
There are two main categories of REITs available for investors. Equity REITs are the most common. They invest in properties, own and manage them, and collect rent, much like a typical landlord. Mortgage REITs, or mREITs, invest in mortgages and mortgage-backed securities and collect interest.
All types combined, REITs claim gross assets in excess of $3.5 trillion in the US alone. Many are publicly traded on the stock exchange, much similar to stocks. And it is this class of listed REITs we discuss in this article.
Advantages of investing in REITs
So, why choose Real Estate Investment Trusts over other investment products? For an individual investor struggling to finance a real estate asset on their own, REITs provide an excellent opportunity to be part of the property boom.
But there are several other benefits they can offer investors, which make them a prudent choice.
1. Minimize risks
REITs typically invests in several income-generating real estate assets. So, instead of placing all your savings in a single property, you get to spread the risk of your investment over several assets. This increases the chance of offsetting a low return on one property with the help of several other high-performing ones.
Moreover, REITs will help you eliminate the risks associated with purchasing real estate on your own—from negative cash flows to tenants defaulting on rent payments.
2. Diversification of your portfolio
When investing your savings to secure your post-retirement financial freedom, it’s important to avoid placing all your eggs in one basket. Diversifying your portfolio by investing in several products can help you minimize risks in the long term and build a more robust and secure portfolio.
This is because each asset class responds differently to social, economic, and geopolitical events. For example, while stocks plunged during the COVID-19 pandemic, some real estate categories have managed to hold their ground. So REITs make an excellent addition for a diversified portfolio to minimize the impact of constant market volatilities.
3. High liquidity
For many investors, buying quickly during an uptrend and exiting fast when the risks emerge is an important criterion to react and respond to market changes. And similar to company shares, publicly traded REITs provide higher liquidity so you can buy and sell as required.
Now compare this with purchasing and selling real estate. Listing a property in the market and finding a buyer can take months during a downturn, and can prevent you from exiting a depreciating asset on time.
4. A stable return
Real estate is an asset class with tremendous growth potential in the long run. Whether it’s residential, retail, or industrial properties, long-term demand will only move in one direction—up.
Therefore, REITs make a smart investment to yield a stable return with dividends and long-term capital appreciation. In fact, they often provide a better return to investors compared to stocks. In the US, for example, SEC requires REITs to payout at least 90% of their taxable income as dividends. So, this ensures their investors receive a regular sizable return.
5. Better transparency
Real Estate Investment Trusts listed on the Stock Exchange need to comply with various operational and reporting rules and standards. For example, they are required to disclose important operational changes, risks, and financial information.
Therefore, as an investment product, they assure better governance and transparency compared to private REITs. This makes them appealing to especially individual investors looking to safeguard their hard-earned savings.
6. A hedge against inflation
Inflation can have different levels of impact on various investment products. For example, escalating product prices lower the purchasing power of consumers, which in effect leads to declining product sales. Therefore, many company stocks react negatively to rising inflation.
However, REITs can provide relatively better protection against it. This is because real estate rent tends to increase together with inflation. According to Nareit, “REIT dividends have outpaced inflation as measured by the Consumer Price Index in all but two of the last 20 years.” This makes Real Estate Investment Funds a smart option to include in a diversified portfolio.
Choosing your investment
Inarguably, publicly traded REITs provide an excellent opportunity to gain exposure to the real estate sector growth without incurring high capital expenditure, risks, and time commitments. They represent a highly liquid, transparent, and regulated investment product that can offer a stable return for the individual investor.
However, keep in mind that the dividends they yield are taxable in many countries. And similar to any other investment asset, they are not immune to market changes either.
So select REITs prudently by evaluating their real estate portfolio, historical performance, and valuations. Assess your investment goals and risk appetite and opt for listed REITs over privately held options.
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