Reit Funds: Smart Investment Or Risky Business?

Real Estate Investment Trusts (REITs) are a key consideration for any investor looking to construct a well-balanced portfolio. They are a great way to diversify your investments beyond the stock market and can be particularly attractive for their strong dividends and long-term capital appreciation.

REITs are companies that own or finance income-producing real estate. They are traded on major stock exchanges, and investors can benefit from both the share price and regular dividends.

There are several benefits to investing in REITs, including portfolio diversification, regular income, and liquidity. However, there are also some drawbacks, such as tax implications and sensitivity to interest rates.

Ultimately, the decision to invest in a REIT fund depends on your financial goals and risk tolerance. It is always recommended to consult with a financial advisor to determine if REITs are a suitable investment for your portfolio.

High-yield dividends

Real estate investment trusts (REITs) are known for their high-yield dividends. They are required to distribute at least 90% of their taxable income to shareholders annually in the form of dividends. In return, REITs typically do not pay corporate taxes.

REITs offer about a 4% dividend yield on average, more than double the S&P 500’s average. Many REITs offer yields of 5% or more. Some of the highest-yielding REITs include Orchid Island Capital (18.6% dividend yield), ARMOUR Residential REIT (14.8%), Ares Commercial Real Estate (15.1%), and AGNC Investment Corp. (14.2%).

It's important to note that a high yield on a REIT is not always positive. A high yield can sometimes be a sign of trouble. For example, it could be that the REIT's stock price has fallen so much that the dividend yield looks high. Therefore, it's crucial to review the REIT's payout ratio, which should be based on cash flow rather than earnings, as REIT earnings can be significantly affected by depreciation.

Overall, REITs can be a great option for investors seeking regular income and diversification.

Portfolio diversification

Real Estate Investment Trusts (REITs) can be a good way to diversify your portfolio. Here are some reasons why:

Access to Real Estate Market

REITs provide investors with access to the real estate market, which is an important asset class for every investor to consider owning. By investing in REITs, you can gain exposure to a range of real estate properties in different geographic locations, without having to buy, manage, or sell properties yourself.

Low Correlation with Other Assets

REITs have a low-to-moderate correlation with other sectors of the stock market, as well as bonds and other assets. This means that REIT returns tend to move independently of returns on other assets, smoothing out the overall volatility of a diversified portfolio.

Reduced Risk and Increased Returns

The low correlation with other assets helps to reduce the overall risk of a portfolio. REITs also tend to have lower volatility than traditional stocks due to their larger dividends. This can make them a good hedge against the ups and downs of other asset classes. Additionally, investors who diversify their portfolios by including REITs have historically had a better chance of ending up with higher returns.

High Dividends and Competitive Returns

REITs are required to distribute at least 90% of their taxable income to shareholders as dividends, and they have historically provided high, steady dividend income. They also offer the potential for moderate, long-term capital appreciation, with returns that have been similar to those of other stocks and higher than lower-risk bonds.

Liquidity

Publicly-traded REITs are easily bought and sold on major stock exchanges, providing liquidity to investors. This is in contrast to buying and selling actual properties, which can be a time-consuming and illiquid process.

Transparency and Governance

Publicly-listed REITs are monitored by independent directors, analysts, auditors, and the business and financial media, providing investors with transparency and a measure of protection. Publicly-traded REITs also tend to have better governance standards than non-traded or private REITs.

Recommended by Financial Advisors

According to a study by Chatham Partners, 83% of financial advisors recommended REITs to their clients, with the majority agreeing on the underlying long-term fundamentals that support their inclusion in a diversified portfolio.

Drawbacks and Risks

While REITs can be a valuable addition to a portfolio, there are some potential drawbacks and risks to consider:

• Tax burden: REIT investors must pay taxes on dividends received, unless the REITs are held in a tax-advantaged account.
• Interest rate risk: As interest rates rise, it becomes more expensive for REITs to borrow money and refinance debt, and their stock prices tend to fall.
• Non-traded and private REITs: These can be expensive to invest in, with high account minimums, and they are often illiquid, requiring investors to hold them for years. They also have fewer disclosure requirements, making their performance harder to evaluate.
• Heavy debt: REITs are among the most indebted companies in the market due to their legal requirement to distribute most of their income. However, this has not typically been a cause for concern as REITs have long-term contracts and stable cash flow to support their debt payments.
• Low growth and capital appreciation: Since REITs pay out most of their profits as dividends, they may struggle to raise cash for new investments during financial crises or recessions.
• Property-specific risks: Certain types of REITs, such as those focused on hotels, can perform poorly during economic downturns.

REITs can be a valuable tool for portfolio diversification, offering access to the real estate market, low correlation with other assets, high dividends, liquidity, and the potential for competitive returns. However, it is important to carefully consider the risks and do your research before investing.

Liquidity

REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors. Most REITs are publicly traded on major stock exchanges, such as the New York Stock Exchange (NYSE) and the Nasdaq Exchange, making them highly liquid investments. Shares of publicly listed REITs are readily bought and sold on these exchanges daily, providing an efficient way for investors to access the real estate market.

Publicly traded REITs offer greater liquidity compared to owning real estate directly, where buying and selling properties can be a lengthy and complex process. With a click of a button, investors can buy or sell REITs on the stock market, making them a convenient and flexible investment option.

However, it is important to note that not all REITs are equally liquid. There are also public non-traded REITs and private REITs, which are not listed on stock exchanges. These types of REITs are less liquid and may have holding periods of several years. Public non-traded REITs, for example, are known for their illiquidity and may be challenging to value due to a lack of readily available financial information.

Additionally, private REITs, which are not registered with the SEC, are generally only available to institutional investors or high-net-worth individuals. The lack of regulation and disclosure requirements for private REITs can make them riskier and less liquid investment options.

In summary, the liquidity of REITs varies depending on their structure and listing status. Publicly traded REITs offer the highest level of liquidity, while public non-traded and private REITs have lower liquidity due to their restricted access and trading mechanisms. When considering investing in a REIT fund, it is essential to understand the specific characteristics and liquidity features of the REIT to make an informed decision.

Long-term capital appreciation

Real Estate Investment Trusts (REITs) are a good option for long-term capital appreciation. They are companies that own, operate, or finance income-producing real estate. REITs are required to pay out at least 90% of their taxable income to shareholders through dividends, providing a steady stream of income for investors.

REITs have historically delivered competitive long-term performance, with returns similar to those of other stocks and more than the returns of lower-risk bonds. They have also outperformed stocks during some periods, including over the last 20, 25, and 30 years, where they have outperformed large-cap stocks. Additionally, REITs have outperformed bonds in every historical period over the past 40 years.

REITs are a good option for long-term capital appreciation due to their ability to generate dividend income, their low correlation with other assets, and their potential for moderate long-term capital appreciation. They are a good way to diversify an investment portfolio, as they tend to "zig" when other investments "zag," helping to reduce overall volatility and improve returns.

Furthermore, REITs offer liquidity, as they are traded on major stock exchanges and are easy to buy and sell. They also provide transparency, as they are monitored by independent directors, analysts, and auditors, and their performance and outlook are publicly available.

However, it is important to note that REITs have some limitations, such as tax implications and market-linked risks. The prospect of capital appreciation may also be relatively low compared to other investments since REITs return 90% of their earnings to investors.

Overall, REITs are a good option for long-term capital appreciation, especially when combined with other investments as part of a diversified portfolio.

Low correlation with other assets

Real Estate Investment Trusts (REITs) have a comparatively low correlation with other assets, making them an excellent portfolio diversifier. This low correlation helps to reduce overall portfolio risk and volatility, and can improve returns for a given level of risk.

REITs are a good counterbalance to stocks, bonds and cash, and can be a hedge against inflation. They are also less volatile than traditional stocks, due to their larger dividends.

REITs are a good option for investors who want to balance their stock investments with real estate, but don't want the complexities and time commitment of direct property ownership.

Frequently asked questions