Real estate investing has seen quite an upswing in sales. The demand is high, and the short-term outlook is good.
But do you need to be a real estate mogul to participate in this market?
Financial advisors tout the benefits of diversifying portfolios into different asset classes. These advisors often suggest real estate as a key diversified asset.
But following this advice often requires getting involved with buying and selling real estate.
Traditional real estate investing requires a commitment of capital and time. But for those investors who have neither, a great alternative is real estate investment trusts (REITs). These investments are a specialized form of dividend investing.
They were introduced in the 1960s and have been a popular way for any investor to ride the tides of real estate. They can do this while avoiding all the baggage that comes with traditional real estate investments.
Strict requirements dictate which investments are classified as REITs. The main component of the requirements is that REITs must pay 90% of their taxable income as a dividend.
Another requirement is that the company invests a significant portion of its assets in real estate.
Not all REITs are created equal
While REITs can generate great returns, it’s crucial to choose the right ones for your portfolio. Investors make the mistake of chasing yields. It is natural to want the highest returns possible.
However, higher-than-average yields can be a sign of managers covering up problems.
Another consideration is the type of REIT. As the name implies, mortgage REITs invest in mortgages, while equity REITs invest in real estate assets. Investors often believe that both markets move in tandem, but that is not always the case.
REITs can be divided into other subcategories, such as commercial, residential, and industrial. Further, you’ll find REITs for specialized niches, such as lodging or infrastructure.
It is useful for investors to track the health of the subcategory. Knowing about the market can reduce any nasty surprises that may hit that market.
Investors should consult their tax professionals before investing in REITs. Investors should evaluate their portfolios for the overall mix of assets. Returns from REITs can cause an imbalance.
Dividend-paying stocks provide some protection during downturns in the market.
REITs offer higher yields than most dividend-paying stocks. For further protection against downside risk, investors can buy put options on REITs. This assumes the REIT stocks are optionable.
