Are you looking to further diversify your portfolio? Maybe you want to invest in real estate but you don’t have the funds to put a down payment on a house because you are still working on taking control of your finances? In this post, I will examine what a real estate investment trust (REIT) is. In addition, I will review why you should consider it as part of your portfolio, a few quick facts about REITs, and how you can get started investing in a REIT.
What is a REIT?
A real estate investment trust, or a REIT, is a company that owns real estate. They can own different types of real estate: commercial properties, office buildings, hotels, etc.
Why REITS? – Diversification!
If you already own a home or property, a REIT may not be a good decision because your portfolio is likely real estate heavy already. However, if you do not have any real estate in your portfolio you may want to consider a REIT. Maybe, you do not have the funds to purchase your own property? Or, you may not want to own a property because you are fine renting. What it all comes down to is
Maybe, you do not have the funds to purchase your own property? Or, you may not want to own a property because you are fine renting. What it all comes down to is diversification of your portfolio.
At first, I was interested investing in REITs. Then, I realized that over 50% of my net worth was tied up in my townhome and that for my situation it made sense to invest in other areas to further diversify my portfolio. You need to make the decision that is best for you!
Quick facts on REITs:
Here are some quick facts I found on REITs:
- REITs may distribute dividend income higher than other funds. WHY? Because the owner does not pay income taxes if they distribute 90% of their earnings in the form of dividends. In contrast, most stocks only pay out around 60% of their earnings because they have to pay taxes first.
- Recently, REITs beat the market in 2014, 2015 and so far in 2016 (returning 18.1% and are trading at an average multiple of 23 times earnings).
- The growth for REITs coincides with the rental market that is growing significantly.
- As mentioned earlier, REITs can help diversify your investment portfolio if you do not have any real estate investments currently.
- Below in Figure 1 is some data from Vanguard on the performance of its REIT index fund compared to the Target Retirement 2050 fund.
As you can see from the Figure 1, when comparing the Vanguard REIT fund performance to the Vanguard Target Retirement 2050 fund the performance is similar. The 10-year performance slightly favors the 2050 fund because real estate didn’t recover as quickly after the crash in 2008.
In contrast, the real estate fund has been steadily increasing over the last five years. The target date funds that are out far in the future, like the Target Retirement 2050 fund, will tend to be spiky because they are invested more heavily in stocks – more risk, but potentially more reward.
I trust Vanguard due to the fact that they have some of the lowest fees for investments you can make: IRAs, 529 savings plans, ETFs, etc. In addition, Vanguard makes it easy and their customer support is good. The one caveat with Vanguard is their high minimum initial contribution.
For Vanguard’s mutual funds, you will need $3,000 for an initial investment. Vanguard also has lower cost REIT index fund Admiral Shares, but the minimum initial investment is $10,000. Finally, Vanguard offers REIT ETFs, which do not have a minimum contribution. I must admit, I do not know as much about ETFs, but they look like a good option. Feel free to comment if you know more about ETFs.
Call to action:
In summary, a REIT is a company that owns real estate. Take a look at your situation and figure out what is best for you and your family. Do you currently have any real estate in your portfolio? Does your portfolio have good diversification?
I like the motto: Trust, but verify. Please check the quick facts I provided and let me know if I was wrong with any of them – I make mistakes 🙂
If you do not have the funds to invest in real estate, or if you do not want to purchase your own property – then you may want to consider REITs to better diversify your portfolio. The performance of the Vanguard REIT fund has a double-digit return, 10.44%, since its inception in 1996. That is pretty remarkable considering the housing crash between 2008 and 2011. Finally, if you are looking to get started, Vanguard makes it easy.