When you think about real estate investing, the first thing that probably comes to mind is your home. Of course, real estate investors have lots of other options when it comes to choosing investments, and they're not all physical properties.
If you’d like to invest in real estate immediately, with as little money as possible, look at real estate investment trusts (REITs).
How to Invest in Real Estate – Quick Guide
- Discover the leading option for individual investors - Real estate investment trusts (REITs) provide indirect real estate exposure.
- Choose your favorites – Individuals can purchase shares of publicly traded REIT stocks and exchange-traded funds.
- Start investing in real estate – create an account with a broker like CAPEX.com and fund it to get started.
To help you find the best real estate companies for your portfolio, CAPEX.com has compiled a list of the best real estate stocks and funds by region. Tap into big yield with top real estate investment trusts.
What are REITs?
Real Estate Investment Trusts (REITs) are companies that raise funds by selling shares of stock and issuing bonds in order to purchase and lease out real estate assets like shopping malls, office buildings, apartment buildings, and warehouses.
Real estate investment trusts take the fuss out of owning real estate. Management handles all the ownership and rental logistics—you just sit back and collect dividends, which are frequently higher than many stock-based investments. REITs are required to pay out nearly all their after-tax profits to their investors as dividends.
You can buy and sell shares of REIT stock in the market via a brokerage account, like any other public company. This makes REITs about the most liquid real estate investment available. In addition, you can buy shares of exchange-traded funds (ETFs) that own shares of many REITs.
New investors who are working with limited capital but want to build a highly diversified portfolio, can invest in fractional shares.
How do REITs work?
REITs make money in two basic ways: by investing and managing property, and by financing mortgages for real estate. Based on this distinction, REITs are divided into two broad types:
- Equity REITs – These REITs own a stake in the real asset directly and manage it, collecting the rents regularly and maintaining the property like a traditional landlord.
- Mortgage REITs – These REITs own mortgages on the real asset and collect interest or other payments on the financing of that property.
REITs usually borrow a lot of money to buy their properties, just as the typical homeowner does. But the consistent cash flows from rents or other payments allow them to borrow substantial amounts relatively safely. This borrowing allows them to make more money than otherwise.
REITs operate in virtually every sector of real estate, including:
- Single-family homes
- Apartment buildings
- Retail
- Warehouses
- Data centers
- Medical buildings
- Malls
- Hotels
- Cell towers
Those are some of the main categories, but REITs can own almost any type of real property. However, they tend to specialize in certain sectors, preferring to focus on one or two areas, because executives can utilize their in-depth knowledge and professional connections to help the REIT perform better. Plus, investors tend to value-focused companies more highly than diversified businesses.
Historical Returns of REITs
Real estate investment trusts are historically one of the best-performing asset classes. The FTSE NAREIT Equity REIT Index is what most investors use to gauge the performance of the U.S. real estate market. As of June 2022, the index's 10-year average annual return was 8.34%.
Over a 25-year period, the index returned 9.05% compared to 7.97% for the USA 500 and 7.41% for the Russell 2000. Historically, investors looking for yield have done better investing in real estate than fixed income, the traditional asset class for this purpose. A carefully constructed portfolio should consider both.
Types of REITs
As with any stock market sector, real estate stocks can be divided into sub-sectors based on their businesses. The real estate sector is typically segmented into the following sub-sectors:
1. Retail REITs
Shopping centers and freestanding retail make up about 24% of REIT investments.
This is America's single largest investment of its kind. Any retail establishment you frequently visit is probably owned by a REIT.
One must first look at the retail business before considering an investment in retail real estate. What is the current state of its finances and what does the future hold?
It's critical to keep in mind that retail REITs profit from the rent they collect from tenants. Retailers who are having cash flow issues as a result of weak sales may decide to postpone or even skip a payment, which would put them into bankruptcy.
Then comes the difficult task of finding a new tenant. It is imperative that you invest in REITs that have the best anchor tenants because of this. Grocery and home improvement stores are examples of them.
After evaluating the industry, you should concentrate on the REITs themselves. Like any investment, it's critical that they provide solid returns, maintain solid financial standing, and carry as little debt as possible (especially the short-term kind).
Retail REITs with sizable cash reserves will have opportunities to purchase quality properties at distressed prices in a bad economy. The best-run businesses will benefit from this.
The fact that shopping is gradually moving away from the mall paradigm and toward internet shopping, however, raises longer-term issues for the retail REIT sector. Although the subsector is under pressure, landlords have continued to innovate in order to occupy their space with offices and other non-retail-oriented tenants.
2. Residential REITs
These REITs own and manage both multi-family rental apartment structures and prefabricated homes. Before deciding to invest money in this kind of REIT, one should consider several variables.
For instance, areas with poor home affordability compared to the rest of the nation typically have the greatest apartment markets. More people are forced to rent due to the high cost of single-family houses in cities like New York and Los Angeles, which raises the monthly rent that landlords can demand. As a result, the largest residential REITs frequently concentrate on major cities.
Within a specific market, investors should look for population and job growth. Generally, when there is a net inflow of people to a city, it's because jobs are readily available, and the economy is growing. A falling vacancy rate coupled with rising rents is a sign that demand is improving.
If the apartment supply in a particular market remains low and demand continues to rise, residential REITs should do well. As with all companies, those with the strongest balance sheets and the most available capital normally do the best.
3. Healthcare REITs
With the aging of the population and rising healthcare expenditures, healthcare REITs will be a fascinating subsector to monitor. Healthcare REITs make investments in the properties of hospitals, clinics, nursing homes, and retirement residences.
The healthcare system has a direct impact on this real estate's success. The bulk of these institutions' owners relies on occupancy fees, payments from Medicare and Medicaid, as well as private funding. If funding of healthcare is a question mark, so are healthcare REITs.
A healthcare REIT should include interests in a variety of various property types as well as a diversified customer base. Spreading your risk is better than concentrating to some extent.
An aging population should result in an increase in demand for healthcare services, which is generally favorable for the industry. So, in addition to customer and property type diversification, seek out businesses with substantial healthcare experience, robust balance sheets, and a lot of access to low-cost finance.
4. Office REITs
Office REITs invest in office buildings. They receive rental income from tenants who have usually signed long-term leases. Four questions come to mind for anyone interested in investing in an office REIT.
- What is the state of the economy and how high is the unemployment rate?
- What are vacancy rates like?
- How is the area in which the REIT invests doing economically?
- How much capital does it have for acquisitions?
Try to find REITs that invest in economic strongholds. It's better to own a bunch of average buildings in Washington, D.C. than it is to own prime office space in Detroit, for example.
5. Mortgage REITs
Mortgages make up about 10% of REIT assets rather than actual real estate.
Fannie Mae and Freddie Mac are the two most well-known investments; however, they aren't always the best. These companies, which are government-sponsored, purchase mortgages on the secondary market.
This sort of REIT is not risk-free simply because it invests in mortgages rather than stock. A rise in interest rates would result in a decline in the book value of mortgage REITs, which would affect stock prices.
In addition, mortgage REITs get a considerable amount of their capital through secured and unsecured debt offerings. Should interest rates rise, future financing will be more expensive, reducing the value of a portfolio of loans.
In a low-interest-rate environment with the prospect of rising rates, most mortgage REITs trade at a discount to net asset value per share. The trick is finding the right one.
Top REITs for 2023
If you're looking to smooth out some of the volatility in an otherwise choppy market, here are the top REITs with the best value (12-Month Trailing P/E Ratio), fastest growth (revenue and EPS), and most momentum (total return). All these REITs are available in the CAPEX WebTrader platform.
Top REITs traded on the US stock market
American Tower Corp
American Tower (AMT, $234.49) is a leading owner, operator, and developer of multi-tenant cell towers, providing the infrastructure that powers wireless communications networks. The REIT operates globally and owns a portfolio of 221,000 cell tower sites, which include 43,100 sites in the U.S., 49,000 across Central and South America, and 75,500 in India.
Prologis Inc
Prologis (PLD, $110.66) is a global logistics REIT and the world's largest owner of industrial real estate. Its portfolio consists of 4,675 industrial properties and more than 1.0 billion square feet of leasing space. PLD owns facilities across 19 countries, including major supply-chain hubs in North and South America, Europe, and Asia. An important player in the retail logistics chain, the REIT benefits from e-commerce growth driving an insatiable demand for warehouse space.
Camden Property Trust
Camden Property Trust (CPT, $126.00) is a top apartment REIT that has a strong presence in faster-growing Sunbelt markets like Atlanta, Austin, Charlotte, Phoenix, and Tampa. The REIT owns 170 properties comprising 58,055 apartment units and has another five properties in development that will boost the total to 59,894 apartments.
Alexandria Real Estate Equities
Alexandria Real Estate Equities (ARE, $135.37) specializes in research-oriented properties that are leased to life science, ag tech, and technology tenants. The REIT counts major pharmaceutical companies such as Bristol Myers Squibb (BMY), Moderna (MRNA), Eli Lilly (LLY), and Sanofi (SNY) among its tenants. Its life science focus has enabled the REIT to participate in pharmaceutical industry growth and deliver attractive 15% average annual EBITDA growth over the past decade.
Crown Castle International Corp
Crown Castle (CCI, $173.68) is the country's largest provider of shared communications infrastructure. The REIT owns and/or operates a network of more than 40,000 cell towers, approximately 115,000 small cell nodes (used to bolster capacity in areas where data demand is greatest), and 85,000 route miles of fiber. The REIT has a presence in every major U.S. market.
Equinix Inc
Equinix (EQIX, $647.20) is a global digital REIT that operates 248 data centers across 31 countries and serves over 10,000 customers. Following an intense round of buyouts by equity firms last year, Equinix and rival Digital Realty Trust (DLR) are the market's only remaining pure-play digital REITs.
Top REITs traded on the UK and EU stock markets
SEGRO plc
SEGRO plc is a British property investment and development company focusing on edge-of-town flexible business space. The firm switched to Real Estate Investment Trust status when REITs were introduced in the United Kingdom in January 2007, is listed on the London Stock Exchange, and is a constituent of the FTSE 100 Index.
Hochtief AG
Hochtief is Germany's largest construction company and operates globally, ranking as one of the largest general construction companies in the United States through its Turner subsidiary, and in Australia through a 90% shareholding in CIMIC Group.
Vonovia SA
Vonovia SA is one of Germany’s leading nationwide residential real estate companies. Vonovia currently owns and manages residential units in all of Germany’s attractive cities and regions.
Bouygues SA
Bouygues is an industrial group. The company is mainly about real estate development, media, telecommunications, construction, energy, and services. The headquarters is in France.
Deutsche Wohnen SE
Deutsche Wohnen SE is a German property company, and one of the 30 companies that compose the DAX index. They are developing residential houses, apartments, and commercial places.
GECINA SA
Gecina is a French real estate investment trust (SIIC) listed on Euronext Paris and employs nearly 500 people. The Group's business is built around the leading office portfolio in France and Europe, alongside residential assets and student residences, with over 9,000 apartments.
Persimmon plc
Persimmon is a house building that designs, develops, and builds residential housing companies. It constructs residential homes ranging from studio apartments to executive-family homes. The headquarters is in the UK.
LEG Immobilien AG
LEG is a residential market company. It offers tenants a comprehensive service program with numerous events and services. The headquarters is in Germany.
Icade
Icade SA is a multinational real estate investment trust (REIT) that is headquartered in Issy-les-Moulineaux, Paris, France, and is a subsidiary of Caisse des dépôts et consignations. It invests in various types of properties including health care, offices, business parks, housing, and public facilities.
Berkeley Group Holdings plc
The Berkeley Group Holdings plc is a British property developer and housebuilder based in Cobham, England. It is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index.
Rightmove plc
Rightmove plc is a UK-based company that runs rightmove.co.uk, the UK's largest online real estate portal, and property website. It is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index.
Merlin Properties Socimi SA
Merlin Properties Socimi SA is a Real Estate Investment Trust company. It is devoted to the acquisition and management of commercial assets in the Iberian Peninsula and is listed on the Spanish Stock Exchange. Its gross asset value is €12,835 m and its gross rental income is €500 m.
Inmobiliaria Colonial Socimi
Inmobiliaria Colonial is a Spanish multinational corporation, which includes companies in the domain of real estate. The company operates a Real Estate Investment Trust, and its activities are divided between property rental, as well as land and development.
Bellway plc
Bellway plc is a residential property developer and housebuilder based in Newcastle upon Tyne, England. It is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index.
Derwent London plc
Derwent London is a London Focused Real Estate Investment Trust company. It owns a portfolio of 5.6 million sq ft of commercial real estate, predominantly in central London valued at £5.4bn as of 30 June 2020. The headquarters is in the UK.
Redrow plc
Redrow is one of the largest British housebuilders with a network of 14 operational divisions across the UK. It is based in Flintshire, Wales, and employs 2,300 people. It is listed on the London Stock Exchange and is currently a constituent of the FTSE 250 Index.
Great Portland Estates Plc Spread Bet
Great Portland Estates is an Investment and Development company owning £2.6 billion of real estate in central London. It delivers superior returns by unlocking the often-hidden potential in commercial real estate in central London creating great spaces for occupiers and long-term value for stakeholders.
Befimmo SA
Befimmo is a Belgium Real Estate Investment Trust company. The company annual revenue is 180.8 million EUR, annual net income is 57.7 million EUR and total assets are 2,846.4 million EUR as on 2020.
Wereldhave
Wereldhave N.V. is a Dutch real estate investment company founded in 1930, headquartered in the World Trade Center at Amsterdam Airport Schiphol. The company focuses on investments in commercial property.
The Best REIT ETFs for 2023
There are 32 REIT ETFs that trade only in the United States, excluding inverse and leveraged ETFs. The best REIT ETFs should constantly outperform the broader market in the past year.
SuperDividend REIT ETF
The Global X SuperDividend® REIT ETF (SRET) invests in 30 of the highest dividends yielding REITs globally.
- WP Carey INC (WPC): 4.51%
- Gaming and Leisu (GLPI): 4.31%
- Getty Realty Corp (GTY): 4.10%
- Mapletree Pan AS (N2IU): 3.93%
- Capitaland Integ (C38U): 3.82%
Vanguard Real Estate ETF
The Vanguard Real Estate ETF is a behemoth among REIT ETFs, with more than 10 times the assets under the management of its nearest competitor. It invests in REITs and other real estate stocks. In early 2022, the ETF held 168 real estate stocks, led by the following five:
- Vanguard Real Estate II Index Fund: 11.3% of the portfolio
- Prologis (PLD): 6.5%
- American Tower (AMT): 6.5%
- Crown Castle International (CCI): 4.4%
- Equinix (EQIX): 3.7%
This broad REIT ETF offers investors several forms of diversification. Of its nearly 170 stocks, its largest holding is a related REIT index fund that holds shares of 166 REITs and real estate stocks.
iShares U.S. Real Estate ETF
The iShares U.S. Real Estate ETF invests in domestic real estate stocks and REITs. This ETF, managed by BlackRock, had 87 stock holdings as of early 2022, led by the following five:
- Prologis (PLD): 7.7%
- American Tower (AMT): 7.4%
- Crown Castle (CCI): 5.4%
- Equinix (EQIX): 4.3%
- Public Storage (PSA): 4%
Those are the five biggest REITs and operate across several property types, including industrial, communications infrastructure, data centers, and self-storage REITs. Overall, the ETF's 10 largest holdings make up 42% of its portfolio, providing investors with slightly more diversification than Vanguard's ETF even though it has half the number of stocks.
Schwab US REIT ETF
This ETF provides simple access to REITs since it only holds those entities, unlike other ETFs that include non-REIT real estate stocks in their portfolio. It had 139 REITs in the fund as of early 2022, led by the following five:
- American Tower (AMT): 8.3%
- Prologis (PLD): 7.7%.
- Crown Castle (CCI): 5.6%.
- Equinix (EQIX): 4.5%.
- Public Storage (PSA): 3.6%.
Like many other REIT ETFs, the Schwab fund holds REITs based on their market cap instead of using an equal weighting system. Thus, it has nearly identical top holdings as most other top REIT ETFs. Meanwhile, it's top 10 make up 43.5% of its portfolio.
Real Estate Select SPDR Fund
The Real Estate Select SPDR Fund allows investors to make a more direct investment in real estate. This ETF only holds REITs in the S&P 500 Index, which limits its investment pool. As of early 2022, this ETF held only 29 REITs, led by some familiar names:
- Prologis (PLD): 11.2%.
- American Tower (AMT): 10.7%
- Crown Castle (CCI): 7.7%.
- Equinix (EQIX): 6.4%.
- Public Storage (PSA): 5.8%.
As the five largest REITs, it's no surprise to see this group leading the way. Further, because this ETF concentrates only on REITs in the S&P 500, its top 10 holdings made up 61% of its portfolio. That makes it an ideal option for investors seeking to focus on the largest REITs.
>> Best ETFs to buy in 2023
The Keys to Assessing Any REIT
Keep in mind the following points when assessing any REIT.
- REITs are true total-return investments. They provide high dividend yields along with moderate long-term capital appreciation. Look for companies that have done a good job historically at providing both.
- Unlike traditional real estate, many REITs are traded on stock exchanges. You get the diversification real estate provides without being locked in long-term. Liquidity matters.
- Depreciation tends to overstate an investment's decline in property value. Thus, instead of using the payout ratio used by dividend investors to assess a REIT, look at its funds from operations (FFO) instead. This is defined as net income less the sale of any property each year and depreciation. Simply take the dividend per share and divide it by the FFO per share. The higher the yield the better.
- Strong management makes a difference. Look for companies that have been around for a while or at least possess a management team with loads of experience.
- Quality counts. Only invest in REITs with great properties and tenants.
- Consider buying an ETF that invests in REITs, and leave the research and buying to the pros.
According to the Securities and Exchange Commission, a REIT must invest at least 75% of its assets in real estate and cash and obtain at least 75% of gross income from sources such as rent and mortgage interest.
Advantages and Disadvantages of REIT Investing
As with all investments, REITs have their advantages and disadvantages.
Advantages
- High-yield dividends: One of the biggest benefits REITs have to offer is their high-yield dividends. REITs are required to pay out 90% of taxable income to shareholders. Thus, REIT dividends are often much higher than the average stock on the S&P 500.
- Portfolio diversification: Another benefit is portfolio diversification. Not too many people could go out and purchase a piece of commercial real estate in order to generate passive income. However, REITs offer the general public the capability to do exactly this.
- Highly liquid: Furthermore, buying and selling real estate often takes a while, tying up cash flow in the process. Yet REITs are highly liquid—most can be bought or sold with the click of a button.
- Professional management: Real estate companies offer shareholders a layer of professional management that is focused on managing the company’s portfolio of properties to maximize shareholder value.
Disadvantages
- Dividends are taxed as ordinary income. There are some drawbacks to REITs of which investors should be aware, most notably the potential tax liability REITs can create. Most REIT dividends don't meet the IRS definition of qualified dividends. That means that the above-average dividends offered by REITs are taxed at a higher rate than most dividends.
- Interest rate risk. Because real estate companies often finance the properties in their portfolios, interest rate change creates risks for investors. If interest rates rise, a company may generate less net income that can be paid out in the form of dividends.
- Management costs. While shareholders in real estate stocks enjoy professional management, that management comes at a cost. Salaries and benefits to company managers can greatly reduce a real estate company’s net operating revenue.
- Property-specific risks. Hotel REITs, for example, often do extremely poorly during times of economic downfall.
How to Invest in REITs
As referenced earlier, you can purchase shares in a REIT that's listed on major stock exchanges. You can also buy shares in a REIT or exchange-traded fund (ETF).
To do so, you must open a brokerage account. Or, if your workplace retirement plan offers REIT investments, you might invest with that option. Check here what REIT investments are available.
If you decide to open a brokerage account (and don't already have one), the process is straightforward. You'll provide basic contact details and certain personal details (e.g., Social Security number and a valid ID). You'll be asked for some additional information about your income, occupation, and investing experience.
Depending on which stockbroker you choose, you'll be able to sign up online at their website or mobile app, or in person at a branch location.
Once your account is open and you can access it online, use the education and research tools available to begin reviewing possible REIT investments. Your brokerage account should also have a screening tool that can assist you in fine-tuning your research and selection.
Once you've chosen the REIT investment that best fits your financial needs and investment goals, you can proceed to buy it online. Before you do, make sure you understand the nature of fees that your broker may charge and fees/expenses associated with the actual investment (such as fund expense ratios).
Just as with your other stock investments, you'll want to monitor your REIT investment periodically.
Ways to invest in REITs
There are two routes to investing in crypto stocks: speculating on their prices using CFDs or buying the assets in the hope they increase in value.
Trading REIT stocks and funds using CFDs
A CFD is a contract in which you agree to exchange the difference in the price of a cryptocurrency from when you first open your position to when you close it. You are speculating on the price of the market, rather than taking ownership of the REIT stocks and funds. If you open a long position and the REIT stock does increase in value, you’ll make a profit, but if it falls in price, you’ll make a loss – the same logic apply for a short position.
Before you can start, you would need to open a CFD trading account.
Buying cryptocurrency stocks
Alternatively, you might decide to buy a REIT, which means that you take ownership of a portion of the company or fund outright, with the intention of holding it with a brokerage and profiting if it increases in value.
Before you can start, you would need to open an investing account with a broker like CAPEX.com.
Each investor should research the available ways to invest in crypto stocks before deciding what’s the best option for their situation. Remember that even if crypto stocks are not as volatile as cryptocurrencies, you shouldn’t invest more than you are willing to lose.
How to invest in Real Estate Investment Trusts with CAPEX.com
Here is how to invest in Real Estate Investment Trusts with an international, highly regulated broker like CAPEX.com:
- Choose which type of account you want to use. Your first concern should be your risk appetite and time horizon. If you want to buy and hold REIT stocks and funds open an investing account. If you want to speculate on price movements (including falling prices) with zero commission and leverage open a CFD trading account.
- Create an account. Regardless of your chosen account, you need to register and complete the KYC process to verify your identity.
- Fund your account with fiat money. Before buying and trading any REITs, you need to fund your exchange account with U.S. dollars, Euros, or other currencies.
- Select your REITs. It’s time to decide on your first real estate investment. We strongly recommend that you thoroughly research the public companies that have real estate holdings or are somehow invested in the real estate space. Of course, you may choose to invest in one or more companies through ETFs.
- Place a buy order for your chosen REIT. Follow the steps required by the trading platform to submit and complete a buy order for one or more REIT stocks and funds.
When trading REIT stocks and funds, the CFDs (contracts for difference) are stored in your account and are far more liquid. However, you should be aware that CFD trading is fast-moving and requires close monitoring. As a result, traders should be aware of the significant risks when trading CFDs. There are liquidity risks and margins you need to maintain; if you cannot cover reductions in values, your provider may close your position, and you'll have to meet the loss no matter what subsequently happens to the underlying asset.
With CAPEX, you can trade CFDs on +2.000 stocks and ETFs and invest in +5.000 stocks and ETFs with ownership.
FAQs
Are REITs Good Investments?
Investing in REITs can be a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation.
How Can I Add Real Estate to My Portfolio?
Aside from buying properties directly, ordinary investors can purchase REITs or funds that invest in REITs. REITs are pooled investments that own and/or manage properties or own their mortgages.
Why should I invest in REITs?
Total return investments are REITs. They often offer both substantial dividend yields and the possibility of modest long-term capital growth. The long-term total returns of REIT stocks typically outperform lower-risk bonds and are comparable to those of value stocks.
Due to the substantial dividend income that REITs offer, they are a valuable investment for both retirement savers and retirees who need a steady income source to cover their living expenditures. Because REITs must yearly distribute at least 90% of their taxable income to shareholders, their dividend payments are sizable. However, any investment involves risk and you should not invest more than you can afford to lose.
Will investing in REITs diversify my portfolio?
Over the past few decades, assets have become increasingly correlated. This has challenged advisors to identify investments to better diversify their clients' portfolios. Fortunately, REITs provide investors access to meaningful diversification opportunities. In fact, according to Chatham Partners' research, most advisors now invest their clients in REITs, and the most frequently cited attribute as to why is "portfolio diversification."
What REITs Should I Invest in?
Each type of REIT has its own risks and upsides depending on the state of the economy. REIT investing through a REIT ETF is a great way for shareholders to engage with this sector without needing to personally contend with its complexities.
How Do You Make Money on a REIT?
Since REITs are required by the IRS to pay out 90% of their taxable income to shareholders, REIT dividends are often much higher than the average stock on the S&P 500. One of the best ways to receive passive income from REITs is through the compounding of these high-yield dividends.
Can You Lose Money on a REIT?
As with any investment, there is always a risk of loss. Publicly traded REITs have the particular risk of losing value as interest rates rise, which typically sends investment capital into bonds.
Are REITs Safe During a Recession?
Investing in certain types of REITs, such as those that invest in hotel properties, may not be a great choice during an economic downturn. Investing in other types of real estate such as healthcare facilities or retail can be a way to hedge against a recession. They have longer lease structures and thus are much less cyclical.
Why Is Real Estate Considered to Be an Inflation Hedge?
Home prices tend to rise along with inflation. This is because homebuilders' costs rise with inflation, which must be passed on to buyers of new homes. Existing homes, too, rise with inflation though. If you hold a fixed-rate mortgage, as inflation rises, your fixed monthly payments become effectively more affordable. Moreover, if you are a landlord, you can increase the rent to keep up with inflation.
Who invests in REITs?
According to reit.com, approximately 145 million Americans live in households that are invested in REITs directly or access them through REIT mutual funds or exchange-traded funds (ETFs).
- Institutional investors like pension funds, endowments, foundations, insurance companies, and bank trust departments invest in REITs.
- There are millions of Thrift Savings Plan (TSP) participants who have access to REITs in their stock choices.
- Nearly 100% of target date funds, which are prevalent in 401k plans, have REIT allocations.
Is homeownership a substitute for investing in REITs?
A house is a consumption good, not an investment, particularly when financed with a sizable mortgage. It does not produce current income, but rather requires regular mortgage interest, real estate tax, insurance payments, and maintenance costs. In contrast, REITs represent an investment in commercial real estate, which generates continuing income flow from rents.
Additionally, a REIT is a liquid investment that is diversified across a range of real estate properties in a variety of geographic locations. By comparison, a house is a comparatively illiquid asset whose investment risk is not diversified, but rather highly concentrated. REITs are real estate working for you.
