Why do you have to go through the trouble of buying and selling actual properties while you can own real estate shares via Real Estate Investment Trusts (REIT)? If you hear this from your spouse or friends, you are not alone. A piece of actual real estate is not as liquid as stocks, which you can buy and sell in a matter of minutes after you have done your homework on the company. However, you will have the opportunity to choose a particular investment property in terms of location, size and condition and style while REIT is a broad investment in properties. REITs give no more visual stimuli than stocks of manufacturing, energy, medical or waste management businesses. From the view of an artist, designer or architect, it is boring. Once you have a place of your own, you can put your artistic, designing and constructing spin on it. To some, nothing beats that, regardless of a landlord’s challenges.
Owning a piece of actual property is different from having shares of REITs even from financial and investing perspectives. REIT does not proportionally represent real estate weight in the S&P 500 as real estate rentals and leasing has significantly bigger presence in GDP. Even when real estate is generally in demand like right now, you may still find the one that makes economic sense to you, or the one that you are willing to pay, but it is not feasible to do it this way with REITs. Buyers may be more willing to pay for the properties than the company that own them or vice versa. In 2015, REITs are lagging behind home builders and the broader stock market, and are expected to have further uncertainties if the Federal Reserve raises interest rates. The REITs index that had a great run last few years was finally down a high single digit percentage in 2015. A good time to invest in REIT?
REIT stocks are not perceived as awfully cheap at this time although stocks that are trading at relatively high multiples do not necessarily mean they are overpriced. One reason can be the investors’ willingness to pay a higher price for the company’s future growth.
Why do REITs remain an investment option? Although REIT, such as Vanguard REIT (VNQ 144), iShares U.S. Real Estate ETF (IYR property & mortgage), MSCI US REIT Index (143) or Dow Jones US Select REIT Index, is a broad index investment vehicle, there are options for investing in concentrated areas with individual REITs, such as, apartments (Equity Residential EQR), multifamily communities in metropolitan areas (AvalonBay AVB), shopping malls (Simon Property Group SPG), hotels & resorts (Host Hotels & Resort HST), self-storage spaces (Public Storage PSA) and medical facilities (Health Care REIT HCN) as well as buildings that average investors may not get access to like Empire State Building (Empire State Realty Trust ESRT). The payouts of REIT stocks can also be attractive to investors. REITs shares are publicly traded and are required to pay at least 90% of their corporate income to shareholders in the form of dividends, which is typically taxed at a higher ordinary income rate rather than the lower dividend rate. REITs may be held in an individual retirement account or 401(k) for tax reasons. Investors may also consider REITs for the purpose of diversification even though you most likely have had some exposure to REITs via your index funds.