Among investors, there is always an ongoing discussion over whether real estate is a better long-term investment than stocks. While we let time decide which one of these options is better, I feel that both asset classes have place in almost all personal portfolios.
Today, let’s look at an instrument class that offers the best of both worlds. When you buy a share of a real estate investment trust (REIT), you are buying a share of the property owned and/or income produced by the trust. REITs own, operate, or finance properties such as apartments, hotels, office buildings, and retail spaces.
Broadly speaking, there are two types of REITs in the market, Equity REITs own and operate income-generating properties, such as apartments, office buildings, shopping malls, hotels, or industrial facilities. They generate income primarily from renting or leasing these properties. After paying expenses for operation, equity REITs pay out dividends to their shareholders on a yearly basis. Mortgage REITs (mREITs) invest in mortgages and other real estate debt instruments. They derive their income from interest earned on mortgage loans or mortgage-backed securities. Mortgage REITs are more focused on the financing aspect of real estate. Each type of property is built with the proceeds of a mortgage, and some REIT investors collect the interest paid on the mortgage as income.
REITs offer investors unique advantages compared to other real estate investments-
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REITs are probably the most liquid real estate investment options available in the market.
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Passive Real Estate Ownership, meaning investors can enjoy the benefits of real estate ownership without having to endure the headaches of managing the property.
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In the USA, the Internal Revenue Service (IRS) mandates that REITs distribute 90% of their taxable income to shareholders. These payments come to investors in the form of periodic dividends, generating a regular and dependable income.
Comes with liquidity, this instrument class is sensitive to fluctuations in interest rates. It has been observed that REITs behave like stocks in the short term and provide returns like real estate in the long term.
Here are a few popular REIT options based on the kind of underlying real estate investments (This is for education purposes only, not an investment advice):
1. Residential: Avalon Bay (Ticker: AVB), Essex Properties (Ticker: ESS)
2. Commercial: Realty Income (Ticker: O), Prologis ( Ticker: PLD)