The New Investors Playbook: REIT Edition

Adem is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Take the boom of 2004, mix in the bust of 2007, throw in the Fed hinting at higher mortgage rates, and what do you have? A real estate market that’s downright scary to new investors. But fear not, Fool -- you haven’t missed the rally.

Introducing: The Real Estate Investors Playbook

Despite the recent rise for housing related stocks, any "interest rate" driven sell-off in Real Estate is your buying opportunity. Be ready! 

Here are the best investment vehicles for those who are new to real estate today:

1. Home Ownership

If you have the means, you should consider buying a home while mortgage rates are still at historic lows. There are multiple ways to win with home ownership (including rental income). Best of all, you actually get to live in this investment. Bonus!

 2. Landlording

This is a tried-and-true way of investing for income, but there are real risks to landlording in its purest form (like being sued). If you don't have the pockets for that you can still be a landlord -- through REITs.

REIT it stands for Real Estate Investment Trust, but at its core, it is a lucrative and safe(r) form of landlording. REITs are trusts whose portfolios include many real estate properties. You can buy shares like stocks, and by law, they need to pay out 90% of their rental income profits to shareholders. So if property values rise and are sold, your stock goes up; if rent goes up, so do your dividends.

When it comes to income generating real estate, rent and trends matter above all else. Here are a few REITs that offer upside in both categories.

Campus Crest Communities (NYSE: CCG)

This trust operates in the growing market of student housing. It holds nearly 30 properties with more than5,000 apartment units. As the unemployment gap between skilled and unskilled labor widens, a college education will remain in demand.

Campus Crest has a predictable and relatively safe growth trend behind it, and it offers its customers a pleasant upgrade to traditional “dorm living." These properties are growing in popularity, so today’s yield of 5.12% should get even fatter. In fact, despite only going public in 2010, CCG recently increased its yield a hefty 26%!

Healthcare REIT (NYSE: HCN)

Speaking of dividend increases, nothing says you’re on the right side of a trend quite like being able to up your quarterly payout (from $0.66 to $0.77) amid recessionary conditions. Through the greatest recession of our time, that's exactly what Healthcare REIT has done.

I love this REIT for the multiple trends it stands to benefit from. As people live longer, and as our country's demographics shift toward the older end of the spectrum, HCN is set to thrive with an attractive portfolio of both health-care facilities and senior living communities.  These undeniable growth trends should lead to increased rental income, and the yield should continue its steady march upward.

So while today’s yield of 4.74% is great, if you buy today, and the yield grows like it did over the past handful of years (through a recession), you’ll be looking at a yield near 6% in a few short years.

Equity Residential (NYSE: EQR)

Even in the dark days of the real estate meltdown, apartment rent increased. Unlike most real estate markets, multifamily properties (apartments) are about as dull and predictable as it gets; that’s why I like EQR as part of your REIT portfolio.  EQR holds 152,000 units throughout roughly half the country, all of which stand to gain from tough “buyers” markets. Simply put, people need a roof over their head in every market! EQR currently yields a little more than5%, but it is worth mentioning that residential rates (and your dividend) will fluctuate from year to year.

But as long as you have a long-term view, these fluctuations can create new buying opportunities. That's why EQR works, so long as it’s just a part of your portfolio.

Your real estate playbook: admit what you don't know

Real estate is an attractive investment over the next thirty years, because we do know that:

  • Despite potential near-term increases, mortgage rates will be at near record lows.
  • The foreclosures of 2008 are being soaked rapidly up as demand increases
  • It's physically impossible to substantially increase the "supply" of land!

But the funny thing about all types of investing is that your best returns will come after you admit what you do not know. For that reason, you should avoid REITs in areas that operate in financial instrument manipulation, or ones that are in slowing sectors.

I also recommend that real estate newcomers start their portfolios by buying a few shares of a diversified REIT ETF (exchange traded fund). Funds like the SPDR Dow Jones Global Real Estate ETF (NYSEMKT: RWO) offer wide diversification, since they include REITs in sectors ranging from retail to storage. You can rest assured that you have downside protection, should one sector of real estate falter.

This fund in particular offers a yield around 4% and very low expenses for its “diversification peace of mind." And RWO really is diversified; not only does the ETF own REITs across different sectors, but also different countries! Some brokerage houses may even offer shares of broadly diversified REIT ETF’s commission-free, which will allow you to dollar-cost-average into your shares at a discount.

If you keep a diversified ETF as your cornerstone, and mix in a few individual REIT names that offer both high yields and growth catalysts, you stand to win long-term in real estate. 

Adem Tahiri owns shares of SPDR Dow Jones Global Real Estate ETF. The Motley Fool recommends Health Care REIT. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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