Real estate investment trusts, or REITs, are a solid way to diversify your investment portfolio.
While no investment is a guarantee, REITs could hedge against rising inflation, produce cash flow and mitigate some risk to your existing portfolio — depending on your current asset mix. They can also appreciate in value over time.
Unlike other real estate investments, REIT investing is generally more accessible to individual investors. This is because you’re essentially buying shares — like you would with mutual funds — but of a company that owns and manages income-generating properties. This makes them cheaper to purchase.
REIT investing has gained popularity in recent years, and you might be wondering whether now’s a good time to invest in them. GOBankingRates spoke with Justin Godur and Robert Johnson, two financial advisors, to get their thoughts on the matter. Here’s what they said.
REITs Have Historically Had High Returns
According to Robert Johnson, a chartered financial analyst and a professor of finance at Heider College of Business, Creighton University — as well as the chairman and CEO at Economic Index Associates — investing in real estate investment trusts could be a good idea for some investors. This is primarily because of their historically solid performance.
“The expectation is that the Federal Reserve will pursue an expansive monetary policy (that is, lower interest rates) in the near future and this may be an opportune time for investors to consider equity or mortgage REITS,” Johnson said.
He illustrated this with an example from the McGraw-Hill book, “Invest With the Fed.”
“In [this book], Gerald Jensen of Creighton University, Luis Garcia-Feijoo of Florida Atlantic University and I studied the performance of REITs with respect to different Federal Reserve interest rate environments,” he said.
“From 1972 through 2023, we found that equity REITs performed very well when rates were falling — returning 17.1% annualized. And mortgage REITs did even better, returning 22% during periods when interest rates were falling.”
Returns Have Been High This Year, Too
It’s not just past returns that have been high. Justin Godur, a financial advisor with Capital Max, indicated that REITs have proven resilient even in volatile markets and that they — along with the real estate market as a whole — have seen higher returns this year than usual, thanks to increased consumer spending.
“With inflation rates stabilizing and interest rates remaining relatively low,” he said, “REITs are positioned to offer attractive returns.”
REITs Offer a Simple Way To Diversify
Portfolio diversification is key to mitigating risk and maximizing returns, but while some investments are harder to get into or require a ton of starting capital, REITs are a relatively inexpensive way to diversify.
“The diversification benefits REITs offer cannot be overstated,” said Godur. “Unlike direct real estate investments, which can be capital-intensive and illiquid, REITs provide an avenue to diversify your portfolio with lower entry costs and better liquidity.”
For example, if you want to invest in real estate the traditional way, you may need to save up for a sizable down payment or else take on a potentially high-interest mortgage loan. With a REIT, you can purchase shares instead. Some brokers even offer partial shares to those who can’t afford the full thing.
You’re likely to take on some risk by adding these to your portfolio, ones that aren’t inherent in the stock market. For one, the value of your investment is based heavily on the real estate market. If interest rates rise and demand drops, your investment could also lose value.
You’re also more likely to see long-term value with REITs, making them better for long-term investors. Still, the accessibility and ability to diversify could be worth these risks and limitations.
REITs Are Highly Liquid
With traditional real estate, liquidity is hard to come by. It could take weeks or months to sell property and get those cash returns.
But with a real estate investment trust, you can buy and sell shares online through your brokerage account. This means more flexibility and the ability to access greater cash flow when needed — provided your investment has gained value.
All of this, of course, is on top of the fact that REITs tend to generate passive income through monthly, quarterly or annual dividends.
“REITs are a particularly good investment for investors seeking cash yield,” said Johnson. “By their very nature, REITs … must pay at least 90% of its taxable income as a dividend to shareholders annually.”
Many REITs will pay out all earnings, however.
These Investments Can Be Very Timely
It’s not necessarily wise to try to time any market, but Godur suggested that investing in niche REITs — particularly in sectors like healthcare facilities and renewable energy projects — could result in more gains. This is a potentially riskier strategy, but for savvy investors, it could be an opportunity to capitalize on emerging trends.
“Investing in REITs this year appears to be a promising strategy,” said Godur. “It’s a move that aligns well with the current market dynamics and could yield significant returns for savvy investors.”
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