Investing in the real estate with REITs: advantages and operations

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The advantages of REITs, Real Estate Investment Trusts, are the possibility of accessing the real estate market even with small investments, the elimination of direct risks associated with property management, the monthly coupons.

investing in REITs

Maybe you are thinking of investing in real estate but you are disappointed by the real estate market and do not believe that it will give satisfaction in the future. In fact, the average price of residential property from the end of the 1950s to today has been substantially rising, reaching its all-time high in 2007 (in the US and Europe). But today many wonder if this trend is not facing a structural (that is, long-term) reversal, because the market is flooded with real estate. Generally, in economy, a lot of supply means low prices.

There are also other problems, for example in some countries the tax burden on property owners is high (especially if rented), the maintenance costs cannot be neglected … Investing in real estate is still possible, but in a declining market you need to know what you’re doing.

In addition to a tendentially adverse economic trend, in the real estate investment there is also the problem of the entry threshold: for investments such as shares, bonds etc … you can also spend only a few thousand euros, but you can hardly find a real estate investment opportunities with such low entry thresholds.

There are two solutions for those who want to invest in real estate by significantly reducing all the problems mentioned so far: the first is to invest in ETFs real estate, the second, which I try to explain in this article, are REITs, Real Estate Investment Trusts.

What is a Real Estate Investment Trust

A REIT is a listed company that manages real estate investments and represents, in fact, an alternative tool to direct investment in real estate. REITs can be said to be investment funds specialized in real estate. These companies, in fact, physically own numerous properties, with the aim of leasing them and having a high ratio between the area owned and the area occupied.

In addition, very often, local tax legislation grants REITs significant tax advantages, provided that they distribute most of their profits in the form of dividends to shareholders. The distribution of profits, in many cases, is even monthly.

The REITs income fluctuates from 5% to around 8% per annum (paid in monthly fractions), with peaks around 10%.

Last note on REIT dividends and stock market value: if a REIT does not distribute monthly profits, its stock market value would grow continuously, giving us great gratification for the difference between the purchase price and current value. But investing in real estate with REITs it is used to generate automatic revenues, better collect monthly rents and keep the value of the security lower.

The advantages of investing in REITs

Compared to a direct investment in the real estate sector, investing in REITs has these advantages:

  • you can invest in the real estate market even with very small sums, while direct investment in a property normally requires higher capital
  • it is possible to diversify the investment by acquiring shares in countless properties simultaneously, reducing market risk
  • the shares of a REIT can be exchanged on the stock exchange like normal shares, therefore you can easily invest in real estate markets even very far away
  • REITs normally provide a rich and constant coupon flow (they pay a large part of the rents that they collect directly to their shareholders, who remain the owner of the assets)
  • the companies already have their own structure dedicated to asset management, therefore we will not have to worry about collecting rents or defaulters and, let alone, maintenance.

In summary, in my opinion REITs allow you to invest in real estate avoiding the main risks and disadvantages of real estate investment and leaving us only the opportunities.

Obviously, this investment must also be made taking into account our personal asset allocation to structure a balanced investment portfolio. For example, the great investor David Swensen allocates 20% of its ideal portfolio to this type of asset (it is only a case study, everyone must evaluate their own situation).

Select REITs on which to invest

The starting point should be to select the reference real estate market. At least initially it is good to focus on a flourishing country, with a healthy and growing economy. The best positioned countries in these terms can be found on the Country Economy website. As can be seen, the best are Scandinavian countries, Germany, Switzerland, Canada, New Zealand, Singapore, Australia. REITs are very active in North America, so Canada could be a good choice.

At this point you can move on to selecting the company. My advice is to split the risk by selecting at least two or three REITs: it is true that the property portfolio is already well diversified (the first Canadian REIT owns properties for 45 million square meters), but it is advisable to diversify also in terms of management capacity and integrity of management.

Better to consider the most historical REITs, some have been paying monthly dividends for 40 years!

Fundamental elements of the company must also be taken into consideration, such as the performance of revenues and profits, and the equity structure. Choose companies with healthy balance sheets even if the stock is priced at stock market multiples higher than others.

It is always good to also keep in mind the market trend, that is, to check in which phase the stock is located: even if in an investment of this type the timing of entry is not fundamental, it is preferable to try to buy in the most favorable moments.

If you want to compose a REIT portfolio it may be wise to proceed with some purchases staggered over time.

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