Back in the 60s, Congress created REITs: Real Estate Investment Trusts—so that the —average American could reap the benefits of income earning property.
REITs allow individuals to invest in large scale income producing real estate, without the hassle and overhead of going out, buying, and managing property.
REITs offer investors multiple benefits: Diversification, Dividends, Liquidity, and Transparency.
While operating under the same rules and regulations as other public companies REITs have, over the long term outperformed the S&P 500, Dow Jones Industrials and NASDAQ Composite, while also showing little correlation to the performance of the broader market.
There are two kinds of REITs:
Equity REITs derive their income from rent on real properties, usually things like malls, industrial facilities, apartment complexes, hotels, hospitals, and more.
Mortgage REITs derive their income from interest earned on mortgages or mortgage securities.
There's some criteria a REIT must meet to qualify—modeled after mutual funds, and recognized as a corporation, it must have a minimum of 100 shareholders, be managed by a board of directors or trustees, invest 75% of its total assets in real estate, and derive at least 75% of its gross income from rents on real property, interest on mortgages financing real property or from sales of real estate.
Should I buy REITs?
I did some research, asked my investing mentor, and checked the performance of my own REITs. I'll let you decide for yourself.
Here's a take from my investing mentor (who opts to remain anonymous).
To start I wanted a REIT in my portfolio some years back to diversify. This was maybe 6 years ago when REITs were booming which they did through '16. My broker recommended Cole, a nontraded REIT. Cole held stand alone commercial real estate occupied by national chains like Walgreens. Their occupancy rate was high and the renter assumed most or all of the maintenance. It was golden. I received a 6.5 % dividend till it went public and I made a healthy gain on its sale. I immediately ploughed all my earnings into another Cole REIT. This time there were problems. Cole allowed themselves to be acquired by American Realty which immediately had a compensation scandal.
Cole product sales dwindled immediately nationally as broker confidence in them diminished. Then it looked like Cole was going to be taken over by Apollo Global, a private equity firm at a fraction of their worth. That's when I decided to bail. It was hard getting a redemption from Cole too. They were resistant. There was a minimal redemption penalty as I had held the REIT for some time. The ample dividend it paid more than compensated. With both REITs I walked away with a 50% profit over approximately 4 years. It was a frightening experience. Nontraded REITs are hard to redeem quickly.
Finally, I now hold a tradable REIT fund through my NY Life variable annuity but it's only a small fraction of my portfolio. It's been down as much as 9%. It is rated high risk.
Projections for REITs have been mixed. Some segments have been slated to do well like commercial office space due to the uptick in the economy, and Internet sales storage facilities for companies like Amazon. But I just read an article claiming commercial property overall is now overpriced, and the 7 year REIT rally is ending. Investors have not embraced REITs since they got a separate S&P sector listing. REITs pay around a 4% dividend and are seen as a haven for investors when they are risk averse. This is not the case now, which is why REITs are down.
In an article for Forbes, Brett Owens claims REITs are the sector to take off for 2017. He took pains to bust a common REIT myth that they fall as interest rates rise, and even provides data that proves that REITs actually perform better as rates rise. He also suggest 5 REITs to buy, 3 of which I own personally—Public Storage (PSA), Simon Property Group Inc., (SPG), and Ventas Inc., (VTR).
My own REIT portfolio has yielded 13.2% to date.
REITs are a great way to diversify your portfolio, but do your due diligence before deciding to pull the trigger for yourself!