For many market participants and onlookers alike, 2021 was kind of a weird year. And, if the past couple weeks are any indication, 2022 could be an even wilder ride.
The past couple of years haven’t only been filled with meme stocks, crypto fads, and generational highs. In fact, 15% of all current U.S. stock market investors say they first began investing in 2020. This is happening for a few reasons:
- The rise of increasingly-accessible platforms and investment structures,
- Pandemic-related financial anxiety
- Stimulus programs
A new generation of investors will make investment decisions that will play a significant role in shaping the market for the foreseeable future.
And, if you’re one of those new investors, have we got a shameless plug for you.
What is a REIT and how does it work?
A REIT (or real estate investment trust) is a user-friendly real estate investment vehicle. REITs give everyday investors the advantages of investment real estate.
A REIT is a corporation that invests in real estate on behalf of its shareholders, and is required by law to distribute at least 90% of income in the form of shareholder distributions.
Why do REITs belong in my portfolio?
Every investment portfolio should include real estate. Investment real estate offers new investors in particular an important set of advantages:
- Real estate is a physical asset that will always be in demand. Real estate has what economists call use value: no matter where it is, or what state it’s in, land is useful for something. Land is essential for fulfilling basic human needs like food and shelter. The basic value proposition of real estate lasts forever: land is a timeless human need that will always be worth something.
- Real estate benefits from economic forces. Mortgage payments stay the same, while rents go up forever; in a market like that, it’s better to be a seller than a buyer. Additionally, public policy ensure that real estate is effectively secured by the full faith and credit of the U.S. government.
- Real estate is a hedge against inflation. When times are good, the value of conventional real estate investments moves up and to the right. When times are bad, investors and consumers allocate their funds towards necessities before luxuries. That means that real estate performs well even when other markets are in recession.
- Real estate offers great returns — dollar for dollar, the best ones routinely house indexes like the S&P 500. Real estate is one of the historically best-performing assets.
It’s no surprise that real estate is the go-to asset class for the wealthy. And, REITs are a great place for everyday investors to include real estate in their portfolio:
- Accessibility. The most obvious way to invest in real estate is going out and buying property. But, maintaining and managing rental property requires a significant amount of skill — and that’s not even considering responsibilities like accounting, tax, financial management, and legal. The nice thing about investing in a REIT is any investor can send in a check or buy some shares, let professionals do the work, and wait for those sweet distributions.
- Diversification. Generally speaking, it’s best practice to put your money in different places. In other words, you should diversify your investment portfolio. With a REIT, returns are a function of the entire portfolio’s performance, which means investors are better-protected against everything from adverse market forces to surprise maintenance issues.
- Liquidity. If you’ve ever tried to do it yourself, you know it’s hard to sell a house. Fortunately, it’s easier to sell an ownership share. Newer investors with smaller margins of error are more likely to need money quickly to offset unexpected costs. Some REITs have withdrawal penalties, but investing via a REIT still usually comes with greater liquidity than other options.
For new investors, one key benefit of REITs is that they unlock many of real estate’s advantages as an asset class without a ton of time, money, and energy.
REITs can be an ideal choice for set-it-and-forget-it investments because of their great returns, diversification, and tax advantages..
There’s a lot of REITs out there. And you should probably invest with more than one, to obtain exposure to a variety of strategies and further mitigate risk via diversification.
For newer investors just starting out in real estate investment, a REIT can be a relatively safe, lucrative, low-commitment option, with serious potential over the long haul.