Every investor needs REITs in their portfolio but the best REIT may be one you haven't heard of yet.
Real estate investment trusts are absolutely critical to filling the gaps in your property investing strategy but the REIT vs real estate debate isn’t over.
I've been investing in real estate for more than two decades and love buying property directly but there's a place in every investor's portfolio for REITs. These investment funds are great for diversifying your real estate by property type and location.
By the end of this video, you’ll know why REIT stocks beat the market and the best new REIT investment for your portfolio.
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Why You Need Real Estate in Your Portfolio
If you’ve been following the blog you know I’m a huge fan of real estate investing. I started my professional career as a commercial property analyst before managing my own portfolio. No other asset has created as much family wealth as real estate and I truly believe that everyone should have some exposure in their investments.
That’s why I’m excited about this video, the first in a three-part series in partnership with Streitwise where we’ll talk about how real estate fits in your total wealth strategy, how to get that exposure and an exciting new way to invest.
Today I’m going to show you exactly why you need real estate in your portfolio, how you can use it to create a stress-free strategy with returns that beat a simple stock, bond mix. We’ll talk about some of the challenges in property investing and how I get most of my real estate exposure with dividends over 5% and without having to lift a finger.
Stocks versus Real Estate: Which is the Better Investment?
So a question I get a lot is real estate versus stocks, which is the best investment and I’ve really got two answers.
First, the short answer is real estate, hands down. Real estate returns beat stocks in almost every time period. In fact, over the 30-years through 2017, real estate provided an 1,800% return according to the NAREIT all equity REIT more than double the total return of 731% on the S&P 500.
Not only are the returns higher but real estate offers better protection against inflation. You know, over that 30 years, the value of the dollar has been cut in half according to the BLS Consumer Price Index. Something you bought for $1 in 1987 now costs $2.16 – including the price of real estate.
But the other answer is why not have both, stocks and real estate? Combining real estate in a portfolio of stocks means you make money whether the stock market rises or not. In the mid-80s when the S&L crisis hit real estate, stock prices did well. When the tech bust destroyed stocks in 2000, real estate was booming.
This is going to mean that your wealth is going to grow steadily, not crashing with the market and you’re not going to freak out when it does.
Why Investors Need REITs in their Portfolio
But that huge advantage in owning real estate runs face first into reality for a lot of investors. Buying and managing property just isn’t possible for a lot of people. Sure, you might be able to manage one or two rentals but own any more and it becomes a full-time job on top of your full-time job.
It costs tens of thousands just for a down payment on one property. That means, for a lot of investors, they’d have to sink their entire nest egg into real estate and anyone that lived through the housing bust can tell you that’s not a good idea.
But there is one type of real estate investment that gives you those double-digit returns, all the exposure you need, without the headaches and problems. You can start with less than $100 and get an investment in multiple properties all across the country and with professional management.
We’re talking about a real estate investment trust or REIT.
A REIT is an investment company that owns real estate and pays out the cash flow to investors. The company is managed by real estate professionals with all the staff and structure you’d expect from a major corporation.
REITs get a special tax break from the government. If they pay out most of their earnings to investors, they pay no corporate income tax. That means huge dividends for investors and less taxes lost to Uncle Sam.
How do REITs Work?
Now one of the best parts is that listed REITs trade just like stocks on any investing platform. You can go into your online account or to any broker and buy a share of a company for less than $100 – in fact, of the almost 200 REITs I follow, prices range from less than a dollar a share to about $170 per share with dividends as high as 13% a year.
It used to be that the only REITs available to regular investors were those traded on the exchanges, while other funds were only available to the wealthy.
Just over the last few years though we’ve seen the rise of online REITs and platforms like Streitwise that have opened the opportunity up to everyone. We’re going to be talking more about these in a bit and over the next two videos.
I’ve been investing in REITs for over a decade and just got into online REITs myself.
For example, one of the exchange traded REITs I own is Welltower, an owner of properties in the healthcare sector that pays a 5.5% dividend. Here’s another one Extra Space Storage which manages storage facilities. The dividend here is only 3.7%, which is still twice the cash return versus the rest of the market, and the shares have jumped 34% from where I bought them just a couple of years ago.
Two Problems with REIT Investing
One of the problems I’ve always had with REITs though is that these tend to be very large companies that need to reinvest in dozens of new properties a year.
That kind of scale can actually work to their disadvantage, one because of the costs of running such a large company, but also because management doesn’t have as much discretion in picking good deals. They have to reinvest cash for growth.
Another problem for listed REITs is that the stock price tends to be more like a stock rather than that smoother appreciation from real estate. For example, when the stock market lost 50% in 2008, REITs lost more than 60% of their value. Now of course real estate prices fell hard too but actual property prices declined also but it was more like 30% – so you have more risk in REITs.
For these two reasons, I’m excited about a new type of real estate investment called the online REIT. These are a lot like REITs except online REITs are smaller portfolios of properties with non-traded shares and most of the time, higher dividend yields.
Since online REITs are smaller than exchange traded REITs, management can pick and choose the properties in which to invest and there isn’t as much regulatory or operational expenses to be covered. A lot of times that’s going to mean better flexibility to go after only the best properties and a higher cash return for investors.
For example, the 1st Streit Office REIT managed by Streitwise invests in high-quality office properties and as of the date of this video, has paid a 10% annualized dividend. The fund is managed by seasoned real estate professionals that have acquired or managed over $5.4 billion in property and across all property types.
Because online REITs are longer-term investments, the share price of the investment or its net asset value, isn’t usually as volatile as stocks or listed REITs.
Against this, there is one disadvantage in that some online REITs are still only available to accredited investors, people with over a million net worth. The Streitwise online REIT is open to all investors but it’s so far the exception rather than the rule.
Now I still own some listed REITs in my portfolio but I’m diversifying into online REITs as well. This three-pronged strategy of owning some properties but diversifying with REITs and online REITs gives me the best of all three. I get that pride of ownership from direct investing in properties but also the diversification and professional management of REITs and high cash return from online REITs.
I’m going to be going deeper into the detail of how you can use online REITs to build a portfolio in our next video. Whether it's with REITs traded on the stock exchanges or these new online REITs, make sure you use this real estate strategy to diversify your portfolio and your property types.