Are REITs a good investment?
June 16, 2022
Real Estate Investment Trusts offer a solution to those investors who do not have the money and time to engage in real estate investment. We agree, real estate isn’t for everyone but REITs are for each and every one. An REIT is a publicly traded company that owns, manages and finances income generating properties. Today, REITs have become an integral part of investment portfolios. The benefits of REITs are many, including high liquidity, steady income, competitive long-term performance, diversification and transparency. REITs are designed to be tax efficient and the assets are secured by long term leases, thus reducing the risk significantly. It can generate consistent income with low risk and low investment.
3 Benefits of Investing in REITs
Before you consider REIT investing, let us take a look at its benefits in detail.
If you are wondering, are REITs a good investment? The answer is yes. The first reason to convince you is the attractive, steady income. It can generate solid returns over the long term in the form of attractive dividends. REITs have to distribute 90% of the income to comply with the IRS regulations and most pay out more than 90% since their cash flow is much higher than the net income.
You can diversify your investment portfolio by adding REITs to it. It will help include commercial real estate in your portfolio and thus, reduce the correlation to the bond and stock markets. The diversification will reduce risk and help improve returns.
Several real estate investments operate with minimal oversight which is why real estate sponsors often make decisions that are not always in the best interest of the investors. But this is not the case with REITs. They are very transparent and are required to follow the SEC requirements. Thus, it gives an additional level of protection so that the management does not take advantage of the investor’s money.
REITS vs Private CRE Funds
It helps to compare and understand if REITs or private funds are a good choice for your portfolio. Let’s delve deeper into the differences between the two.
- Correlation – There is a huge difference between an REIT and private real estate investment. REITs are publicly traded, which means they will have an impact from the stock market movement. With every swing in the market, the REITs will show volatility and it can become riskier to put a large amount into the trust. On the other hand, a private real estate investment made through a reliable company will offer true diversification and allow you to make multiple investments with minimal correlation to the stock market. When you diversify the investment into an account not correlated with the stock market, it will help hedge the investment in case of a market swing.
- Wider choice – When you invest in an REIT, the professionals will invest your money into commercial real estate properties but with private real estate investment, you can choose the property you like. These firms are patient, picky and are open to looking for opportunities across different asset classes and locations. They look for properties that can deliver returns higher than a REIT or the public market.
Real estate investment is a low risk investment with the potential of generating high income. With private real estate investment you get the best property at the most appropriate cost, making it worth the time, money and effort.