Real Estate Investment Trusts (REIT)

It’s 2022, and the last couple of years have been nothing short of a wet, downhill, slippery slope for U.S. stock trading. We’ve asked the question in a recent blog article, “Are We Heading Into a Real Estate Recession?” We discussed Key Economic Indicators in that article. Gas prices since that post in September 2021 have crept over $4 per gallon, the Consumer Price Index is still up, Mortgage Rates in 2022 have also risen, and many investors have considered putting their properties on the market to liquidate cash flow.

I want to remind our savvy investors out there though that Warren Buffett once said in 1986, “it is wise for investors to be ‘fearful when others are greedy, and greedy when others are fearful.’”If your real estate market dips, it will present an excellent time to buy. Markets are cyclical, and they will recover. See the U.S. Median House Prices since 1963 below:

History of US Median Home Prices dating back to 1963 – by Quarter

What is a REIT?

If you’re familiar with REIT’s, you’re welcome to skip ahead. Real Estate Investment Trusts are both private and public (Stock Exchange) money mechanisms that allow individuals to invest in real estate or mortgages like a stock. Think “Real Estate Co-Op,” where a company purchases an entire portfolio of real estate. REIT traders like you then have the ability to contribute dollars to that company to help them buy and sell property in real markets. When profits are earned from the equity, buying, selling, renting, or interest, dividends are returned to the REIT Investors. Individual REIT providers can be large or small, and there are many ways to find them.

REIT Backlash: Negative Feedback

Before I go into how successful these companies have been in 2021, it’s important to discuss why they’re disliked. These are public opinions, based on feedback I’ve gotten and read on social media (a popular place to complain). I’ll provide an opinion at the end of this article.

  1. REIT’s and other Investment Groups are inflating the cost of real estate.
  2. Higher tax liability due to “non-qualified dividends.”
  3. REIT’s decline when interest rates rise for a period. See 2017 SP Global Study.
  4. REIT’s typically convert single family homes into rentals, which change the neighborhood demographic & culture.

What’s your opinion? Leave it in the comments below, or email me: [email protected]

How the U.S. Economy Effects the World

We have to remember that the U.S. Economy is an investment leader. Other economies of the World have their independence, but when American pockets are hurting, the shockwave extends worldwide. Look at the 2008 Housing Bubble aftermath:

Real World GDP | 2007 thru 2010
Rates from the Major Banking Reserves Worldwide | 2007 thru 2009

All that to say – when an American concept performs well… It’s usually adopted Worldwide. And yes, REIT was created in America. In Virginia actually, by Thomas Broyhill during the Eisenhower Administration.

How Have REITs ACTUALLY Performed?

This section could also be titled, “Why Americans love REITs.” The Performance speaks for itself:

  1. REITs have outperformed stocks over the long haul.
  2. REITs perform with stability, even with Inflationary Periods.
  3. REITs have outperformed other major asset classes.
  4. REITs contribute to equity growth in a community.

Take a look at how REIT Subgroups have performed against the S&P 500:

Editor’s Opinion: REITs Definitely Make Sense

REITs are a liquid investment. Selling your shares in a REIT look much different than selling an actual real property. You avoid having to list the property, market it, show it, and all of the other time-consuming traits of selling the real estate. You also have the luxury of diversity, which safeguards you from selling real estate in a specific market with those specific market conditions. Does that make sense? Imagine owning a fixer upper in a poor market when suddenly the market changes! Your margins are impacted instantly. A REIT is typically associated with a large portfolio of real estate in different asset classes (Commercial, Multifamily, Land, etc). If one market tanks, another could surge? The stability of the REIT could protect your profits. REITs also save you time on researching lucrative markets that can provide the best ROI. Your REIT company probably has dozens of professionals doing that for you constantly.

All that today – you’ll still want to pay attention to REIT markets. Don’t just set it and forget it. But you should feel confident placing your money into a REIT.

The final argument is the “Ethical” dilemma of REITs being purchased and changing Median Home Sales and Rent prices. I’m tough to convince, because I’m a firm believer in real estate Ownership versus renting. Renting has it’s purpose, and it’s necessary in certain markets. I get that! But for the average American, owning real estate is a financial mechanism that can move someone from average to wealthy. I’ve seen firsthand what investing in real estate has done for people. I sympathize with housing numbers rising and becoming less affordable, but I also recognize that this has been happening for decades. Supply and Demand will always determine the market, regardless of what’s being bought or sold. 

Shelter will always be a key element of life. So the answer is not to go up in arms against REITs. The answer is to study and research ways to better-position yourself financially so that you can attain a more comfortable lifestyle.


Post a Comment