Why Own REITs?
Sandeep is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you are a landlord or have been considering becoming one, you know that there are significant risks and stress that come with it. I know as I have been a landlord for many years. You may or may not have the right temperament to deal with problem tenants, tenant complaints, emergency repair calls and calls during vacations. Sure, the rental income is great and potential of capital gains is very attractive. However, it takes special attributes in addition to the right temperament, such as discipline, organizational skills, and a proactive mindset to be successful as a landlord. Even with all that, bad luck can bring a lot of stress to your family and your life, not to mention additional financial liabilities. If you are caught in the wrong direction of the housing cycle, it could be years or even decades before you see capital gains on your property and your capital is tied up along the way. So, what is the alternative? You could hire a property manager to deal with the routine hassles of real estate management but this usually drains your earnings from the property and you are still not sheltered from the eventual surprises. Or, you could invest in something called a REIT.
A REIT is a security which trades just like stocks on major security exchanges and it invests in real estate directly. These companies receive tax advantages from the government as they typically provide investors high yield on their investment by returning a significantly high portion of their free earnings to the shareholders. A shareholder is free to invest an amount they are comfortable with rather than locking themselves to a large debt of the entire real estate value in case of a direct purchase of a property. REITs provide their shareholders a fractional ownership instead of total ownership of their properties. They also have a much broader scope of properties both geographically and in terms of value that they can invest in. The investment in REITs, just like stocks, are liquid and therefore can be pulled out at any time. While you are invested, you collect your earnings share from the rental operations in the form of dividends which are taxed at a more favorable rate than rental income you receive directly from a property you own outright.
A REIT offers a stress free way of investing in the real estate market while benefiting from the liquidity of stock investment. There are many types of REITs and the more you learn about them, the more you can engage to specific trends in the real estate markets. For example REITs invest in residential properties, hotels, commercial buildings, hospitals, malls and even cell phone towers.
With direct ownership of rental properties, your time horizons are typically very long. Similarly, you can take advantage of the housing trend and invest for a decade or more into a REIT while riding the up cycle. If you are not sure of the uptrend, you can pull out your capital and put it to an alternative investment. You collect dividends stress free while you make up your mind. You can either enjoy the dividends you collect in the interim or reinvest it to further compound your return.
Here are three investments which I currently own and have been very satisfied with. Needless to say, these are very long term investments in my portfolio.
Senior Housing Properties Trust (NYSE: SNH) is a REIT which specializes in senior living communities. It is a bet on the demographic trend of our population base getting older. Its current yield is 6.89%.
HCP Inc. (NYSE: HCP) has a yield of 4.4%. It specializes in health care related buildings including hospitals, medical offices, senior housing, nursing homes etc.
If you are not confident enough to bet on such sectors within the real estate market, you may want to consider a more diversified REIT investment via ETF's. Take a look at the Vanguard REIT Index ETF (NYSEMKT: VNQ). It is an ETF which invests in REIT stocks relating to office buildings, hotels and other real estate buildings in the U.S. It tracks the MSCI U.S REIT Index. More information can be found at their website. The current yield of this ETF is at 3.3%
Given that housing and real estate market in the U.S have basically been in a slump as a result of the 2008/2009 crisis, REIT's make for an attractive long term, decade or longer, investment play. You can invest in a specific REIT if you wish to make a bet on a specific sector of the real estate market or you can diversify via ETF's.
DISCLAIMER: I am long VNQ, HCP, SNH
DeepmanBajpai owns shares of VNQ, HCP, and SNH. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.