Real Estate Investment Trusts – or “REITs” – allow individual investors to own a basket of real estate properties via a third-party, reducing the headaches that accompany real estate ownership and management.
REITs are investment structures that finance, own, and operate real estate, and pay a stream of income to investors. They provide differentiated, liquid exposure to real estate, while providing income-generation. Rather than requiring direct investment in the properties themselves.
While REITs are not as well-known as other types of investments, many properties in the U.S. are owned and operated by REITs. You may have seen signs outside shopping centers advertising Kimco Realty or Simon Property Group as owners; both of those companies are retail shopping-focused REITs.
What are the advantages of investing in REITs?
1) Liquidity
Publicly traded REITs are traded daily, just like other public stocks and bonds. In comparison, it can take months to sell a traditional real estate property.
2) High Dividend Yield
REITs must pay out 90% of taxable income to investors in dividends. The average dividend yield of the FTSE Nareit All Equity REIT Index is 4.37%, which is much higher than the S&P 500’s dividend yield of 1.65%.[1]
3) Property/Geography Specialization
Many REITs specialize in specific types of properties, allowing investors to pick and choose what kind of exposure they prefer. Some REITs also specialize in a geographic area. Property types include nursing homes, shopping malls, or single-family homes. For example, an investor seeking to increase exposure to healthcare can choose to invest in REITs that exclusively own and operate medical facilities.
4) Diversification
REITs provide investors with returns through dividend income and long-term appreciation. Since real estate are fairly uncoordinated with stocks and bonds, they can help diversity your portfolio.[2]
Along with stocks, bonds, mutual funds, and exchange-traded funds, REITs are a tool to help the individual investor create a well-rounded portfolio that includes real estate.
If you have questions about REITs, reach out to your financial advisor. FAI Wealth Management invests in REITs and is always happy to explain more about their role in your investment portfolio.
[1] Dividend yields as of 12/31/2022.
[2] Nariet cited the 20-year price correlation between the S&P 500 and the FTSE Nareit All Equity Index as 0.60. The ICE Bank of America Corporate/Government bond index and the FTSE Nareit All Equity Index had a correlation of 0.23.
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