Investors who are seeking income from their portfolios should take a closer look at Real Estate Investment Trusts (REITs). Real estate ETFs took a nasty hit during the subprime mortgage meltdown of 2008, but have produced positive returns since that time as interest rates have remained relatively low.
Here’s what you need to know about REITs and how they can benefit you.
How REITs Work
Congress created REITs in 1960 as a way for the general public to invest in commercial real estate. REITs are companies that purchase, manage and develop commercial real estate properties. Most REITs are publicly traded, and the ones that are not come with some additional risks. The first REITs invested mostly in mortgage companies, but they have since expanded to cover all facets of real estate, including office, residential, industrial and commercial real estate holdings.
REITs are similar to mutual funds in that they are professionally managed and each share that is purchased represents an undivided interest in each of the properties that is owned by the REIT. Investors can also buy and sell REITs during intraday trading as with any other type of publicly traded security. The ability to get into and out of these instruments quickly is one of their major advantages; investors don’t have to wait for months for a sale of property to go through in order to get their money out.
Real Estate Investment Trust (REIT)
REITs are also required by law to pay out at least 90% of their income in the form of dividends to shareholders, which make them an attractive choice for income investors. REITs are affected by changes in interest rates, but the low interest rate environment has helped them to flourish and produce attractive yields.
Mortgage REITs are one of the main REIT subsectors. The iShares FTSE NAREIT Mortgage REIT ETF (REM) is up 0.25% for the year, while the iShares FTSE NAREIT Residential REIT ETF (REZ) has returned 3.41%.
International REITs are struggling in 2018. The Vanguard Global ex-U.S. Real Estate ETF (VNQI) has fallen by almost 11.90% this year. The fund has a current yield of 5.50%, which is higher than the ten-year treasury yield. Even though REITs will be negatively impacted when interest rates push higher, they may still be a better bet than bond funds, as the cost of borrowing will still be very low for some time to come.
The Bottom Line
REITs provide investors with a convenient and liquid way to invest in commercial real estate holdings and earn a higher yield than bonds are paying. There are many REIT ETFs to choose from, and many of them invest in specific sub-sectors of the real estate market, such as mortgage companies or industrial properties. For more information on REITs, consult your financial advisor.
(For further reading, see: 5 Types of REITs and How to Invest in Them.)