Why do you have to go through the hassle of buying and selling real property while you can own real estate stocks through Real Estate Investment Trusts (REITs)? If you hear this from your spouse or friends, you are not alone. Real real estate is not as liquid as stocks, which you can buy and sell in a matter of minutes after you’ve done your homework at the business. However, you will have the opportunity to choose a particular investment property in terms of location, size, condition, and style, while REIT is a broad property investment. REITs provide no more visual stimuli than the actions of manufacturing, energy, medical, or waste management companies. From the point of view of an artist, designer or architect, it is boring. Once you have a place of your own, you can put an artistic, design and construction twist on it. For some, nothing beats that, regardless of the owner’s challenges.
Owning real property is different from owning REIT shares even from financial and investment perspectives. REIT does not proportionally represent the weight of real estate in the S&P 500, as real estate rental and leasing has a significantly larger presence in GDP. Even when real estate is generally in demand like it is right now, you may still find the one that makes financial sense for you, or the one that you are willing to pay for, but it is not feasible to do it this way with REITs. Buyers may be more willing to pay for properties than the owner company or vice versa. In 2015, REITs are lagging behind home builders and the broader stock market, and are expected to have more uncertainties if the Federal Reserve raises interest rates. The REIT index that had a great run in recent years finally fell a high percentage of single digits in 2015. Is it a good time to invest in REITs?
REIT stocks are not perceived as too cheap at the moment, although stocks that trade at relatively high multiples do not necessarily mean they are overvalued. One reason may be the willingness of investors to pay a higher price for the future growth of the company.
Why are REITs still an investment option? Although the REIT, such as the Vanguard REIT (VNQ 144), iShares US Real Estate ETF (IYR Property and Mortgage), MSCI US REIT Index (143), or Dow Jones US Select REIT Index, is a broad index investment vehicle, there are options to invest in concentrated areas with individual REITs, such as apartments (Equity Residential EQR), multi-family communities in metropolitan areas (AvalonBay AVB), shopping centers (Simon Property Group SPG), hotels and resorts (Host Hotels & Resort HST), storage spaces (Public Storage PSA) and medical facilities (Health Care REIT HCN), as well as buildings that average investors may not have access to like the Empire State Building (Empire State Realty Trust ESRT). REIT share payouts can also be attractive to investors. REIT shares are publicly traded and must pay at least 90% of their corporate income to shareholders in the form of dividends, which are typically taxed at a higher ordinary income rate rather than the lower dividend rate. REITs can be kept in an individual retirement account or 401 (k) for tax reasons. Investors may also consider REITs for diversification purposes, although it is very likely that you have had some exposure to REITs through your index funds.