A real estate investment trust (REIT) is essentially an investment trust that buys real estate instead of stocks. While some experts claim that REITs are a great way to diversify your portfolio and earn passive income, there are also many misconceptions about REITs.
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What is a REIT? How can a REIT create wealth and financial security?
Real estate investment trusts (REITs) provide a way for people to invest in real estate without directly assuming all the risks and complexities of real estate ownership, said Dutch Mendenhall, CEO and co-founder of RADD Companies. Ta.
He says they’re worth considering for several reasons. First, REITs are typically run by real estate professionals, who are likely to make more informed investment decisions and reduce risk, he said.
You can also earn income from rent and the appraised value of real estate, so you can earn stable cash. He also added that the threshold for investment is low.
“REITs allow you to invest in real estate for large institutional investors with less upfront investment than would be required to invest directly in real estate,” he said. “Overall, REITs offer a way for people to get a piece of the real estate pie while avoiding the risks and headaches that come with owning real estate directly.”
However, several misconceptions about REITs prevent investors from adding them to their portfolios.
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Myth: REITs are illiquid.
Some people think that selling a REIT takes just as much time and effort as investing directly in real estate.
“However, because most REITs are publicly traded, they can be easily sold like any other stock,” said Todd Stern, founder and CEO of The Money Manual. To tell. “One exception is publicly traded non-traded REITs, which are not listed on an exchange and are not what most new REIT investors would buy anyway.”
Cliff Ambrose, FRC, founder and wealth manager of Apex Wealth, echoed this sentiment. Although REITs may not offer the same level of liquidity as stocks, they are traded on major stock exchanges, making it relatively easy for investors to buy and sell stocks compared to investing directly in real estate. He said he could.
“Recognizing this level of liquidity could change investor perceptions and emphasize the accessibility of REITs within a diversified portfolio,” Ambrose added.
Myth: REITs are concentrated.
Another assumption is that each REIT is highly concentrated in a specific niche area of real estate.
While some REITs do, Stern said, there are also many REITs that own real estate in a variety of sectors.
“It’s also a good idea to diversify your REIT holdings, just as you would diversify the rest of your portfolio,” he continued. “So investing in REITs in several different sectors where you believe in the future can be a great strategy.”
For example, you may choose to invest in retail REITs, senior living REITs, industrial REITs, and farmland REITs.
“Each of these options can be fairly concentrated, but they keep your overall REIT holdings diversified,” Stern added.
Myth: REITs are highly correlated with stocks and more volatile than physical real estate.
According to Robert R. Johnson, a professor of finance at Creighton University’s Heider College of Business, returns for most stocks are highly correlated, but returns for REITs and broader stock indexes are less correlated. It is said to be much lower.
“Research shows that REITs provide significant diversification. From 1972 to 2017, the annual correlation between equity REITs and the S&P 500 was 0.54, according to data compiled by Ibbotson Associates.”
Also, when it comes to REIT volatility, because REITs are publicly traded, there is an active market for their shares, and people can watch the value of their holdings go up and down minute by minute. .
“When you buy physical real estate, you can trust that the value will be stable because there isn’t an active market for that property,” Johnson said. “Of course, this is an illusion. Just because there is not an active market for an asset does not mean that the underlying value of that asset will not fluctuate.”
Myth: You don’t need to invest in REITs because you already own a home.
Home ownership is different from owning commercial real estate and earning a profit from your investment. Abby McCarthy, SVP of investments at Nareit, said that historically the average economic return on homeownership has been much lower than owning a REIT.
“They provide investors with a stable supply of high dividends, liquidity, transparency and competitive returns,” she said. “Furthermore, REITs offer real estate and geographic diversification because they provide exposure to a wide range of real estate across the United States. Because homes can only be found on one block in one city, one district, in one state, , homeownership does not provide that kind of diversification.”
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This article originally appeared on GOBankingRates.com: 4 Myths about REITs: What you need to know before investing
