7/13/2019 Comments
These are 3 methods that investors use to include different types of assets in their portfolio: REITs, stocks and real estate investing. So, which one should you settle for? This article will examine each one, along with their advantages and drawbacks, after which you can come to a conclusion. REITs (Real Estate Investment Trusts)
REITs, short for real estate investment trusts, are nothing more than companies. These said companies allow investors to purchase high-quality real estate. REITs are the ones financing the real estate, and by giving investors ways to buy them, they are doing communities a great favor, as they aid them in their growth process.
Stocks
Stocks are quite easy to understand. Basically, when you buy shares from a company, you end up owning a part of the company, but you won’t be in charge of the whole company. For instance, if a business has 500 shares of stock and you end up purchasing 10 of them, 2% of the company will automatically be yours. But there are also times when a company can have millions of shares, in which case you barely own a percentage of the business. In spite of this, the main reason why people are investing in stocks in the first place is that they want to earn some return. The return will either come when a stock pays dividends, or when the price goes up and you can sell the stock for a convenient price if you wish to. Companies are engaging in selling stock shares in order to gain money. The money they raise can be used for investing in the business’s growth, a new product line, or for repaying debt. It’s essential to know that stocks are typically offered through IPO or initial public offering. Therefore, when you purchase a stock, it will be bought from another investor that sells it and not from the actual company.
Real Estate Investing
Although it has to do with real estate too, this type of investment is different compared to REITs. Whereas REITs allow you to invest without actually owning the properties, real estate puts you in the ownership, management or sale of the real estate.
“Average annual returns in long-term real estate investing vary by the area of concentration in the sector. Average 20-year returns in the commercial real estate slightly outperform the S&P 500 Index, running at around 9.5%. Residential and diversified real estate investments do a bit better, averaging 10.6%. Real estate investment trusts (REITS) perform best, with an average annual return of 11.8%.” Below you will see a 20 year chart of the performance of REITs compared to the S&P 500. As we mentioned before, REITs can be more volatile. The top in 2006 for the REIT index to the bottom in 2009 represented a roughly 70% drop. However, the gains were recovered rather quickly. Investing in real estate or REITs after a market crash is definitely a good idea. Comments | CategoriesAll ArchivesSeptember 2022 RSS Feed |
FAQs
Is it better to invest in REITs or real property? ›
Direct real estate offers more tax breaks than REIT investments, and gives investors more control over decision making. Many REITs are publicly traded on exchanges, so they're easier to buy and sell than traditional real estate.
Is there a downside to investing in REITs? ›Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them. Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.
Do REITs perform better than stocks? ›While stocks traditionally have the highest potential for reward over time, they're also the riskiest, and as stock markets plummet around the world, we can see that high risk investments aren't necessarily the best way to get higher returns. So for long term investments, REITs win.
What I wish I knew before buying REITs? ›Lesson #1: The Dividend Should Be An Afterthought
It may sound counter-intuitive, but lower-yielding REITs have actually been far more rewarding than higher-yielding REITs in most cases. That's because REITs are total return investments, and growth and appreciation are even more important than the dividend yield.
REITs provide a much simpler way to invest in real estate and earn consistent income through dividends, but they confer less control, and their upside tends to be lower than that of rental properties.
What is the average return of a REIT? ›As of August 2023, the S&P Global REIT Index returned -3.06% over the past month, 3.57% over the past 3 months, and 2.95% year-to-date as of the most recent reading. The annualized return over the past year was -3.56%, while the annualized 10-year return was 5.46%.
What happens to REITs when interest rates go down? ›REITs. When interest rates are falling, dependable, regular income investments become harder to find. This benefits high-quality real estate investment trusts, or REITs. Strictly speaking, REITs are not fixed-income securities; their dividends are not predetermined but are based on income generated from real estate.
Do REITs go down in a recession? ›REITs historically perform well during and after recessions | Pensions & Investments.
Are REITs good for passive income? ›Since REITs are required by the IRS to pay out 90% of their taxable income to shareholders, REIT dividends are often much higher than the average stock on the S&P 500. One of the best ways to receive passive income from REITs is through the compounding of these high-yield dividends.
Should I invest in REITs or S&P 500? ›REITs can make great investments
REITs have outperformed the S&P 500 over the long term. A big driver has been the robust returns from self-storage, industrial, and residential REITs. The factors that have enabled those REIT subgroups to deliver strong returns remain in place.
Are REITs safer than stocks? ›
If you are interested in a real estate investment that is reliable, hands-off and offers dividends, REITs could be the answer. If you're looking for a higher-risk – but high-potential – investment or want to be able to invest in specific companies you admire, buying individual stocks could be the answer.
What type of REIT is the safest? ›Three of the safest dividends in the REIT sector are those paid by Camden Property Trust (NYSE: CPT), Prologis (NYSE: PLD), and Realty Income (NYSE: O).
What is the 90% rule for REITs? ›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.
What is a good amount to invest on a REIT? ›According to the National Association of Real Estate Investment Trusts (Nareit), non-traded REITs typically require a minimum investment of $1,000 to $2,500.
What is the most profitable REITs to invest in? ›REIT Stock | Forward dividend yield |
---|---|
American Tower Corp. (AMT) | 3.7% |
Welltower Inc. (WELL) | 2.6% |
Public Storage (PSA) | 4.6% |
Realty Income Corp. (O) | 5.7% |
Investors seeking a consistent income may find REITs appealing because they also regularly pay dividends. Investments in Physical Real Estate are suitable for those who prefer a more individualized experience. They gain project experience and a sense of the returns from purchasing, managing, and selling the property.
What is a better investment than rental property? ›As mentioned above, stocks generally perform better than real estate, with the S&P 500 providing an 8% return over the last 30 years compared with a 5.4% return in the housing market. Still, real estate investors could see additional rental income and tax benefits, which push their earnings higher.
Are residential REITs a good investment now? ›Real estate investment trusts, commonly called REITs, can be an excellent choice for investors looking for a security that provides dependable current income and has the potential for capital appreciation. REITs are specialty companies that invest their assets in income-producing commercial real estate.
Is investing in a REIT the same as investing in real estate? ›Here's a look at the key differences between REITs and real estate funds: REITs invest directly in real estate and own, operate, or finance income-producing properties. Real estate funds typically invest in REITs and real estate-related stocks.