REITs: A Great Addition for Any Diversified Portfolio

January 12th, 2024

Real estate investment trusts (REITs) have become an increasingly popular way for investors to add real estate exposure to their diversified portfolios. REITs own and operate income-producing real estate across a variety of property sectors.

When you invest in REITs, you gain access to an asset class that historically has low correlation with equities and fixed income. This provides portfolio diversification benefits including enhanced total returns and lower volatility.

REITs also offer attractive dividend income. As real estate trusts, REITs allow investors to gain exposure to real estate performance without having to become direct landlords. Their liquidity via exchange trading is an added benefit relative to direct property ownership.

Strong Historical Returns for REITs

The FTSE NAREIT All Equity REIT Index, a common benchmark tracking U.S. REIT performance, has delivered compelling 10 and 25 year average annualized returns relative to domestic stocks and bonds:

  • FTSE NAREIT Equity REIT Index: 8.34% (10 year), 12.19% (25 Year)
  • S&P 500: 12.96% (10 year), 9.78% (25 Year)
  • Russell 2000 (Small-cap stock index): 9.07% (10 year), 9.37% (25 Year)

Even with some periods of challenges around economic downturns or rising interest rates, REITs have shown resilience and are well supported by stable long term forces like population growth, urbanization, and deficiencies in housing supply.

When all factors are considered, REITs continue to strengthen the risk-return profile of investment portfolios. Their low to moderate correlation with stocks and bonds makes them powerful diversifiers.

Types of REITs

There are a few main types of REITs that focus on different property sectors:

Retail REITs own shopping malls, grocery stores, retail centers and various commercial properties. With nearly 25% of all REIT investments, the success of retail REITs depends greatly on the overall health of the retail industry. Key factors when analyzing retail REITs include geographic location, anchor tenant quality, foot traffic, sales levels, and ecommerce disruption risks.

Residential REITs account for 18% of REIT investments. They own and manage large multi-family apartment communities, manufactured housing properties, student housing complexes and senior living communities. Drivers include broader economic strength, population and job growth trends, urbanization patterns, and single-family housing affordability.

Healthcare REITs own medical office spaces, lab facilities, hospitals, senior housing communities and skilled nursing facilities. The nearly 15% share of REIT investments in this sector means performance often follows Medicare/Medicaid reimbursement rates along with overall healthcare industry trends.

Office REITs account for 10% of REIT investments focused on owning and managing office spaces leased to businesses small and large. Key factors determining success include local market office vacancy rates, job and economic growth, industry make-up and shifts to remote work.

The remaining REIT investments are in more specialized property types like infrastructure, hotels, casinos, prisons, data centers, cell towers and billboards. There are also mortgage REITs, making loans and investing in mortgages and mortgage-backed securities, which account for about 10% of all REIT investments.

Assessing REIT Investments

Regardless of the strategy, REIT investments should be assessed like any other – with an eye towards total returns driven by cash flow and price appreciation.

Since they trade on major stock exchanges, liquidity is generally not a concern which aids price discovery. Funds From Operations (FFO) is an important metric used to evaluate REITs beyond just earnings per share.

Experienced management, prime property locations, strong tenants via long-term leases, and moderate leverage ratios indicate an attractive REIT investment.

There are stock, bond and real estate ETFs and mutual funds dedicated to REIT investing which offer investors a diversified basket of REITs in a single investment. These professionally managed solutions simplify REIT investing.

How to Invest in REITs

Individual investors have several options:

Publicly Traded REIT Stocks – Similar to buying shares of public companies, investors can purchase individual REIT stocks on exchanges like the NYSE and Nasdaq.

Public Non-Listed REITs – Shares sold directly without a public listing. Minimums tend to be ~$2,500+.

Private REIT Funds – Newer real estate crowdfunding platforms provide exposure to institutional private REITs with lower minimums (~$500) via fintech.

REIT Mutual Funds / ETFs – Provide instant diversification across 20+ REIT stocks in one share purchase. Evaluating historical returns and fees is advised.

REITs can also be added to IRAs and 401ks for preferable tax treatment since retirement accounts defer taxes. Overall, REITs remain an integral part of the modern diversified investment portfolio strategy.

Deciding if REIT investing is right for your portfolio goals deserves careful examination. While REITs offer diversification, dividend income and professional real estate exposure, they still carry risks to understand just like any investment. Conduct self-reflection on your motivations – is it primarily added income, inflation hedging, or overall diversification driving your interest? What is your risk tolerance and timeline? Thorough assessment of these personal factors coupled with expert guidance ensures properly aligning any REIT allocation to your holistic financial strategy.

For tailored advice on smart REIT investing, Empire 8 Property offers complimentary investment consultations. Their team of seasoned financial advisors can objectively evaluate your portfolio, risk factors and investment objectives to provide strategic recommendations on REITs. From suggested allocations to specific REIT picks, tap into their expertise today by visiting Empire 8 Property or calling 0433 213 993 / 0483 000 008 to discuss how REITs can potentially boost your investment performance over the long-term.