REIT real estate stocks and why to invest in REITs

Why invest in REITs?

This is not an article about what REIT stocks to buy, but it does give an idea of why REIT real estate stocks are a good choice for a portfolio.

reit stocks to buy

They provide relatively higher cash flows or dividends than investing in other stocks.

If we compare the yield on the average REIT fund or some REITs, we see that there are some substantial cash flow benefits rather than investing in, for instance, the average stock in the S&P500.

The value of REIT real estate rises with time

Let us get a few things out of the way. REIT real estate stocks are NOT growth stocks. They will never rise through the stratosphere, as investments in Tesla have in the past. Frankly, I do not care. My family is holding REITs for multi-decade investments that continue to compound and grow dividends. This means we are careful about the REIT stocks to buy each time we invest.

However, while they do not go stratospheric, there is evidence that over the last 50 years the overall growth in value of REITS has been slow and steady, but also relatively strong compared to other stocks. For instance, the CAGR for REITs is about 12-13%, outstripping S&P500 (e.g., VOO fund) rates of 11-12% over a multi-decade period. While the difference seems small, it compounds with time, in favor of REITs.

We can invest what we want when we want into REIT real estate

One of the benefits of a REIT real estate investment is that I can buy a share (or, now, a fraction of a share) when we want to do so. If we contrast that to buying a property (e.g., an apartment), we would need to find the deposit and seek a substantial mortgage. This means that we need to wait or save and slowly add big ‘chunks’ of exposure to real estate if we are buying a property directly.

They provide good diversification if you are careful about the REIT stocks to buy

As noted, a REIT allows us to make small incremental increases to our exposure. Buying real estate directly, however, forces us into big chunks of investments. This has two significant implications:

  1. The risk of investing too much at one time. We do not get any advantage from dollar cost averaging. We might find ourselves ‘stretched’ a little, as we need to buy or put down a larger deposit. We might invest right at the top of a market peak and this could be a large and chunky investment.
  2. The risks of having few properties. If I am buying real estate to rent out, I will probably only accumulate a handful of properties. They will probably be exposed to the same market trends as I am likely to buy in the nearby neighborhood. If there is a local downturn in the market or a disaster or the area becomes depressed, then the value of all my property will ‘move together’ in the same direction, exposing me to a lack of diversification and risks.

REITs are great as they invest in hundreds or thousands of properties around the country or globe. I can drip my investments piece-by-piece so I am not going to be caught going all-in at the top of a market cycle. And I can get exposure to different markets and even property types. For instance, family homes, commercial (e.g., retail or other commercial, such as STOR that I talk about here), industrial real estate (e.g., STAG), or other specialized property types I would not normally have the chance to invest in (e.g., hospitals such as MPW or skilled nursing facilities such as OHI). Elsewhere, I list some REIT stocks to buy that I like at the moment, like MPW.

They are hands-off

I will have to credit my wife with this one – as she correctly pointed out to me, I am not the sort of fellow that would enjoy racing out to fix things for tenants. As a consequence, it makes little sense for me to be a landlord. In addition, there are no uncomfortable discussions or worries about needing to raise the rents for your tenants (if you know, for instance, that they face financial hardship or steadily increasing cost of living). REITs provide a nice, hands-off approach to gaining exposure to the real estate market. I do not need to worry about rent increases; the REIT manages this and has a well-developed process for increasing rents over time. No more costs, no more rates bills, no insurance bills. Hey – I do not even need to find tenants. I do not need to pay a property manager to manage the property.

reit real estate

REITs do not accumulate other costs

If I buy real estate and rent it out then a range of costs fall on my shoulders. Taxes. Insurance. Repairs. Maintenance. None of these are outrageous, but when you accumulate them, they rapidly eat into the gains you make. REITs do not come with these costs and, instead, tick over.

We can sell out or gain access to some of the invested funds rapidly and easily

If we have a rental, the market is relatively illiquid. We cannot access that funding easily. We can, in theory, increase the borrowing against it if we discuss it with the bank. Or we can put it on the market and sell it out altogether. Either approach is probably less than ideal. With REITs, however, we can sell out of our positions and access as much funding as we need. For instance, if we needed a small sum for a new car for one of our children, we may not want to sell an entire rental property. But with REITs, we could sell as many units as we desire. In addition, we might also opt to simply use ‘margin’ on the account and withdraw the cash, increasing the leverage on our portfolio (this would be fast and easy to do but exposes us to other risks!).

Why invest in REITs? This is not an article about what REIT stocks to buy, but it does give an idea of why REIT real estate stocks are a good choice for a portfolio. They provide relatively higher cash flows or dividends than investing in other stocks. If we compare the yield on the average…

Why invest in REITs? This is not an article about what REIT stocks to buy, but it does give an idea of why REIT real estate stocks are a good choice for a portfolio. They provide relatively higher cash flows or dividends than investing in other stocks. If we compare the yield on the average…

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