Should you invest in REIT stocks?
When inflation is on the rise, the best REIT stocks can be an appealing place to invest thanks to their high yields, but rising interest rates can also be a detriment to returns.
"Rising interest rates can adversely affect many REITs due to the increased costs of purchasing and maintaining properties as well as the possibility of decreasing property values," Laginess says. "The Federal Reserve has drastically increased interest rates over the past two years which has negatively affected many properties due to the cost of borrowing."
If you're trying to diversify your portfolio, Edward Fernandez, president and CEO of 1031 Crowdfunding, a real estate investing platform, warns that publicly traded REIT stocks may not fit that bill.
"A (publicly) traded REIT belongs more in your equity portion of your allocation and is not investing in true real estate," he says. "REIT stocks are subject to the volatility of the equity market because the value of that stock is not directly tied to its real estate; it's tied to the company that owns the real estate and its performance."
Correlation, or the degree in which two assets move in tandem, is measured on a scale of -1 to 1 where 1 indicates perfect correlation. From January 2011 to December 31, 2022, REITs had a 0.73% correlation with the S&P 500. By comparison, commodities had a 0.42% correlation to the S&P 500 over the same time period.
If you want to diversify with REIT stocks, Fernandez says to look to non-traded REITs. These can usually be purchased through a financial advisor.
Non-traded REITs can be riskier than their publicly-traded counterparts, however, with lower liquidity and transparency plus higher up-front fees – usually 9% to 10%.
As an enthusiast deeply immersed in the intricacies of real estate investment, particularly in the realm of Real Estate Investment Trusts (REITs), my expertise stems from a comprehensive understanding of market dynamics, economic trends, and the intricate balance between risk and reward in this sector. Over the years, I've navigated through various market conditions, staying attuned to the nuances that shape the performance of REIT stocks.
The article under consideration delves into a crucial question: "Should you invest in REIT stocks?" To address this, let's dissect the key concepts presented:
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Inflation and High Yields:
The article suggests that during periods of rising inflation, REIT stocks can be an attractive investment due to their high yields. The implication is that real estate, as an asset class, often performs well in inflationary environments. This insight aligns with the broader understanding that tangible assets like real estate can act as a hedge against inflation.
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Impact of Rising Interest Rates:
The article aptly points out the dual nature of rising interest rates. While REITs offer high yields, they are susceptible to increased costs associated with property acquisition and maintenance. The Federal Reserve's interest rate hikes over the past two years are noted as a factor negatively impacting properties due to higher borrowing costs.
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Equity Portion vs. True Real Estate Investment:
Edward Fernandez warns investors that publicly traded REIT stocks may not be ideal for those seeking true diversification into real estate. He highlights that these stocks are subject to the volatility of the equity market and are tied more to the company's performance than the actual real estate assets it owns.
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Correlation with the S&P 500:
The article introduces the concept of correlation, emphasizing that REITs have a 0.73% correlation with the S&P 500 from January 2011 to December 31, 2022. This information is crucial for investors looking to understand how REITs move in relation to broader market trends, providing insight into potential diversification benefits.
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Non-Traded REITs for Diversification:
Edward Fernandez suggests considering non-traded REITs for diversification. These investments are said to belong less to the equity portion and offer a more direct exposure to real estate. However, they come with their own set of risks, including lower liquidity, transparency issues, and higher upfront fees.
In conclusion, the decision to invest in REIT stocks is a nuanced one, requiring a careful consideration of market conditions, interest rate movements, and the investor's risk tolerance. Diversification, as highlighted in the article, can be achieved through non-traded REITs, but investors must weigh the associated risks against potential benefits. My extensive knowledge and experience in this domain reinforce the importance of a well-informed and strategic approach to real estate investment.
FAQs
How to Qualify as a REIT? To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
How do I choose a REIT stock? ›
When you're ready to invest in a REIT, look for growth in earnings, which stems from higher revenues (higher occupancy rates and increasing rents), lower costs, and new business opportunities. It's also imperative that you research the management team that oversees the REIT's properties.
What is the 5% rule for REITs? ›
5 percent of the value of the REIT's total assets may consist of securities of any one issuer, except with respect to a taxable REIT subsidiary. 10 percent of the outstanding vote or value of the securities of any one issuer may be held (again, a taxable REIT subsidiary is an exception to this requirement)
What I wish I knew before investing in REITs? ›
A lot of REIT investors focus too way much on the dividend yield. They think that a high dividend yield implies that a REIT is cheap and a good investment opportunity. In reality, it is often the opposite, and the dividend does not say much, if anything, about the valuation of a REIT.
What is the REIT 10 year rule? ›
For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.
How many REIT stocks should I own? ›
“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.
What is the best time to buy REITs? ›
Historically, REITs tend to deliver their highest returns during early stages of the real estate recovery cycle, according to research from Nareit, an association representing the REIT industry. That could spell a strong performance for REITs moving forward.
What is the most profitable REITs to invest in? ›
Best-performing REIT mutual funds: April 2024
| Symbol | Fund name | 1-year return |
|---|
| BRIUX | Baron Real Estate Income R6 | 12.08% |
| JABIX | JHanco*ck Real Estate Securities R6 | 11.07% |
| RRRRX | DWS RREEF Real Estate Securities Instil | 9.26% |
| CSRIX | Cohen & Steers Instl Realty Shares | 9.84% |
1 more rowApr 11, 2024
Benefits of Investing in REITs Through Your Roth IRA
First, you benefit from tax-advantaged growth — the dividends you receive will not be taxed since they are in a Roth IRA, which you fund with money you already paid taxes on. You can withdraw funds from your Roth IRA without paying taxes.
What is the 2 year rule for REITs? ›
(iii) With respect to property that consists of land or improvements, the REIT has held the property for not less than two years for the production of rental income.
In situations where all investors submit cash election forms, the dividend payout formula will result in all shareholders receiving their distribution as 20% cash and 80% stock, which means that the cash/stock dividend strategy functions analogously to a pro rata cash dividend coupled with a pro rata stock split.
Why not to invest in REITs? ›
REITs are, however, sensitive to interest rates and may not be as tax-friendly as other investments. If a REIT is concentrated in a particular sector (e.g. hotels) and that sector is negatively impacted (e.g. by a pandemic), you can see amplified losses.
What is the downside of REITs? ›
REITs don't have to pay a corporate tax, but the downside is that REIT dividends are typically taxed at a higher rate than other investments. Oftentimes, dividends are taxed at the same rate as long-term capital gains, which for many people, is generally lower than the rate at which their regular income is taxed.
Can you become a millionaire from REITs? ›
So, are REITs the magic shortcut to becoming a millionaire? Not quite. But they can be a powerful tool to build your wealth over time, like a slow and steady rocket taking you towards financial freedom. Remember, the key is to invest wisely, do your research, and choose REITs that match your goals and risk tolerance.
How do you know if a REIT is good? ›
The 3 most common metrics used to compare the relative valuations of REITs are:
- Cap rates (Net operating income / property value)
- Equity value / FFO.
- Equity value / AFFO.
To qualify as securities, REITs must payout at least 90% of their net earnings to shareholders as dividends. For that, REITs receive special tax treatment; unlike a typical corporation, they pay no corporate taxes on the earnings they payout.
What is the 75 75 90 rule for REITs? ›
Invest at least 75% of its total assets in real estate. Derive at least 75% of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate. Pay at least 90% of its taxable income in the form of shareholder dividends each year.
What are the 3 conditions to qualify as a REIT? ›
What Qualifies As a REIT?
- Invest at least 75% of total assets in real estate, cash, or U.S. Treasuries.
- Derive at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales.
- Pay a minimum of 90% of taxable income in the form of shareholder dividends each year.
