It’s a Real Estate Investment Trust, that’s what it is.
Great, sir, thanks for the vocabulary lesson. Can we go home now?
Oh no, not yet. The class just started! Here’s a Wikipedia definition for you:
(REIT) /ˈriːt/ is a company that owns, and in most cases, operates income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and even timberlands. Some REITs also engage in financing real estate. The REIT structure was designed to provide a real estate investment structure similar to the structure mutual funds provide for investment in stocks.
So, in plain English, a REIT is a company that buys real estate and manages it for a profit.
REITs exist in many countries around the world, and you can buy their shares on the stock market. You can also buy REIT Index ETF’s that hold shares in a basket of REIT stocks representative of the overall REIT market.
Why Would I Want to Invest in a REIT?
Perhaps you want to get into real estate investing, but you don’t know how or don’t have time to do it?
Maybe you want to invest in real estate, but you don’t have enough funds to acquire a single property on your own?
Or maybe you already invest in residential real estate, but want some exposure to the commercial property market or the property market in a country or region where you don’t have expertise?
There are several reasons that you might want to invest in a REIT, and there are many benefits to owning REITs as part of your overall investment portfolio.
Let’s take a look at them one by one.
The Benefits of Investing in REITs
Because there are REITs that invest in all different sectors in any given real estate market (apartments, office buildings, industrial buildings, retail, etc.), they are an excellent way to diversify your real estate portfolio. REITs can help you avoid the risks associated with a single property investment because they diversify:
- across the different real estate sectors in a single country
- across different countries
- your overall portfolio (it adds exposure to the real estate market to a portfolio that might already hold shares of regular companies, bonds, gold, etc.)
A good personal example of diversifying through REITs is when we felt that we had allocated more than enough of our portfolio to residential properties in Canada but wanted to continue to invest in the property market. During the financial crisis, when the stock markets had taken a beating, we added a REIT that specializes in retail and office properties. Over the past few years, that investment has outperformed our residential investments by quite a large margin.
An excellent way to diversify your REIT holdings is to just invest in a REIT Index ETF, which holds a basket of REITs across all sectors. You can buy one that is specific to a single country or one that invests globally.
REITs hire the best managers and experts in the field to take care of their investments. This type of expertise would take you years to acquire, but you can easily leverage the knowledge of experts in the field of real estate by investing in a REIT. You will also avoid the heavy time commitment and certain headaches of finding tenants, dealing with property managers, fixing toilets, and myriad other issues that crop up when investing in a single property on your own.
Due to their structure and laws pertaining to their operation, REITs pay out a large portion of their income in dividends. This means that many REITs pay out dividends that are higher than an ordinary company.
If income is important to you, then adding REITs to your portfolio is an excellent strategy. The REITs that we own all pay out more than 5% a year in dividends. Compare that to what you get in your bank account or even what you may be getting on your personal real estate investments.
Of course, there is also the potential for capital gains if the price of the REIT shares increases.
As REIT shares are openly traded on the stock markets of the world, it is extremely easy to buy or sell your investment. If you need to quickly raise cash or if market conditions change, all you have to do is login to your online broker and send your order. This is in stark contrast to the many months – or even years – it can take to buy or sell an individual property.
5. Low Cost of Entry
In the past, when REITs weren’t available to the small investor, it was very difficult for someone with only a small amount to invest to get into the property market. Buying an individual property generally requires a hefty down payment and qualification for an even heftier mortgage. With REITs, however, you can get a foot on the property ladder with an investment of as little as a few hundred dollars.
What About The Risks?
I have news for you: there are always risks in investing. There is also a risk in not investing. Cash sitting in a bank account earning less than 1% is being slowly eaten up by inflation.
Just like any individual property, REITs are subject to real estate market cycles. Fortunately, over the long term, REITs have been found to have a low correlation to the broader equity markets, which means that they don’t generally follow the overall market. This has the potential to increase the long-term return of your portfolio of investments.
As with any investment, it is always good to do a little research into the recent performance of the overall REIT market and the real estate market in general.
If the market is extremely hot and has increased substantially recently, you may want to hold off investing. If it seems that everybody, including your taxi driver, is recommending that you buy real estate, it is time to beware.
However, if the market seems to be plodding along at a normal pace, prices of REITs are trading at or near yearly lows, or everyone is telling you not to buy REITs, it might be a good time to invest.
As the billionaire investor Warren Buffet is fond of saying, “Be fearful when others are greedy, and greedy when others are fearful.”
Of course, due to our human nature, it’s often challenging to put that philosophy into practice. However, it’s hard to argue with Mr. Buffet’s results, isn’t it? 😎
How about you? Do you have any advice for our community on investing in REITs? Share you wisdom by posting your comments in the box below.