For many investors, real estate is an alternative asset class to consider as part of a diversified portfolio.
Long-term holding times in real estate can bring about serious returns. Average returns on five-year real property investments purchased in 2016 was 38 percent, and that number jumped to 95 percent return on investment for assets purchased in 2011.¹
In addition to asset appreciation, real estate also can provide recurring income from tenant leases. However, being a landlord definitely isn’t for everyone. Some investors participate in real estate by owning shares of real estate investment trusts, or REITs. The majority of REITs are publicly traded companies with a sharp focus on one sector of commercial real estate, such as hospitality, industrial, retail, office, or senior housing.
Owning shares of a publicly-traded REIT is much different from real property ownership – you own stock in a company rather than a physical asset. In this article we’ll look at some potential benefits that can come with long-term ownership of REIT stock to help investors determine whether owning shares of a REIT or real property assets better aligns with their investment philosophies.
What Are Long-Term Investments?
Long-term investments are assets you plan to hold longer than a year. But in the investment world, a year is a very compressed time frame.
Here’s one way to look at it: Short-term investments generally are geared for preserving capital, while long-term investments are geared toward creating capital. Real estate has long been viewed as a favorable long-term investment due to the potential for capital growth through asset appreciation, but there are many other long-term investments that have yielded extremely favorable returns over time.
Common long-term investments include certificates of deposit, bonds, exchange-traded funds, dividend or growth stocks, high-yield savings accounts, and many types of alternative investments. A common investment approach is to spread investment capital across many of these options in an attempt to manage risk and increase the potential for capital appreciation across a broader range of investments.
Do REITs Make Good Long-Term Investments?
According to the National Association of Real Estate Investment Trusts, REITs have provided investors with competitive returns through steady dividend income and long-term capital appreciation through increased share price. Long-term returns for REIT investors typically have straddled a line between the returns that have been delivered through value stocks and those of lower-risk bonds.
REITs can have some advantages over direct property ownership as well. REITs have professional management teams in place who have a strong focus on both portfolio and asset growth. These experienced professionals will typically position their assets to attract and retain tenants so that assets under management deliver stable rental income. REITs also have a historically low correlation to broader movements in public markets. Another potential advantage is liquidity – you can easily buy and sell REIT stock, whereas it’s typically much more difficult and complicated to purchase and divest real estate. Lastly, REITs allow retail investors with limited investment capital to participate in real estate; direct property ownership usually involves much more capital.
The Bottom Line
Depending on your investment strategy, owning shares of a real estate investment trust can be a long-term investment or a short-term hold – and there can be pros and cons to each approach. REIT investors may choose to focus on overall “time in the market” since equity markets are constantly fluctuating but have generally shown to rise over the long term. Investors will have to determine which strategy best matches their investment goals, financial needs, tolerance for risk, and other important investment considerations.
Sources:
1. Average ROI of Real Estate, iPropertyManagement, https://ipropertymanagement.com/research/real-estate-roi
REIT
A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. There are risks associated with these types of investments and include but are not limited to the following: Typically no secondary market exists for the security listed above. Potential difficulty discerning between routine interest payments and principal repayment. Redemption price of a REIT may be worth more or less than the original price paid. Value of the shares in the trust will fluctuate with the portfolio of underlying real estate. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes. This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.
