REITs are a solid way to start investing. Real estate can bring balance to your portfolio, acting as a hedge against inflation and producing stable returns when stocks become volatile. A common misconception surrounding real…
REITs are a solid way to start investing.
Real estate can bring balance to your portfolio, acting as a hedge against inflation and producing stable returns when stocks become volatile. A common misconception surrounding real estate investing is you must own property directly to reap the benefits. Real estate investment trusts offer an alternative for investors who aren’t prepared for, or interested in, the responsibilities of direct ownership. “Investing in REITs is an attractive way for new real estate investors to get their feet wet in a portfolio of real estate without necessarily needing the background or expertise in property strategies,” says Jay Morrison, CEO of the Tulsa Real Estate Fund.
Diversified REITs are few, Morrison says, and for a beginning real estate investor, “the steadiness of a diversified REIT is an appealing attribute.” He recommends W.P. Carey, a global REIT that runs more than 900 properties in 19 countries. “The pro of this option for a newbie is their strategy of retaining strong anchor tenants, such as U-Haul and Marriott (MAR),” since “these anchors are typically contracted to longer-term triple net leases, which require the tenants to cover all utilities, maintenance, taxes and other expenses, creating almost a complete net profit for the REIT.” The downside? This is a larger-sized REIT that can be susceptible to geopolitical shifts.
REITs can also encompass timberland, which can be a growth opportunity. “Catchmark Timber Trust is one of the smallest players in the timberland real estate space primarily engaged in the ownership, management, acquisition and disposition of timberland in the United States,” Morrison says. “With 514,000 acres of commercial timberland across eight states that they both own and operate, their predictable cash flow makes this an appealing option for the inexperienced investor.” CTT has an excellent growth outlook; the downside is “any fluctuation to the timber market or issues specific to the wood products industries could result in significant impact and loss,” Morrison says.
“Industrial is the new retail as Americans buy more and more goods online and have them shipped directly to their home,” says Rob Stevenson, managing director and head of real estate equity research at Janney Montgomery Scott. His REIT pick for beginning real estate investors is First Industrial, which owns nearly 64 million square feet of warehouses that rents to customers like Amazon.com (AMZN) and United Parcel Service (UPS). This REIT has a 2.7 percent dividend yield and is “inexpensively traded compared to its peers,” Stevenson says. First Industrial also has a conservative balance sheet, an easy-to-understand business model and it’s demonstrated solid growth throughout 2018.
Some REITs offer quarterly or annual dividend payouts but monthly may be the way to go for beginners, says Remy Kouffman, co-founder and CEO of Blue Sails. “Monthly-paying REITs are great for first-time investors, because the psychology of getting paid every month just for investing in a company is a great feeling,” he says. His choice for monthly payouts is Whitestone, a retail REIT. Kouffman says one thing investors must watch out for with WSR, however, is increasing competition in the retail space from e-commerce, which continues to change the landscape of the traditional brick-and-mortar shopping model.
Public storage REITs may not seem glamorous, but they can be a portfolio workhorse. “It won’t knock the lights out, but it will deliver over time, with relatively little downside risk,” says analyst Jim Royal. Public Storage is his top pick, as “the leader in the sub-sector, with decades of experience.” It’s also conservatively financed using mostly preferred stock, “so it’s very unlikely to have financing issues.” PSA currently offers a 3.8 percent yield, but Royal acknowledges the dividend may not grow very fast. He says investors should be aware of higher tenancy turnover rates with public storage facilities, which can impact returns.
Health care is another REIT subsector to pay attention to and CareTrust (CTRE) is a REIT to watch if you’re a new real estate investor. “CareTrust is a great REIT for beginners because of the capable management team and the company’s ability to grow its payout at a high rate for years, likely around 10 percent growth,” Royal says. It offers a much better potential for capital gain and a current dividend yield of 4.5 percent. One thing to be wary of is the politics surrounding reimbursement issues. “Sometimes health care reimbursements can be a political fight, leading to some volatility in the stock,” Royal says.
Try a REIT ETF (or three).
REIT exchange-traded funds combine the benefits of REITs with the lower costs and enhanced tax efficiency of an ETF. They’re a great way to gain diversification. Robert R. Johnson, finance professor at Creighton University, says the Vanguard Real Estate ETF (VNQ), SPDR Dow Jones Global Real Estate ETF (RWO) and Schwab U.S. REIT ETF (SCHH) could be good buys for beginners. “Each of those ETFs offer broad diversification across several individual ETFs, thus the investor will earn close to a market average return to the REIT category,” Johnson says. “These ETFs will also tend to be less volatile than individual REITs, which makes them quite attractive to new investors.”