Every investment strategy comes with its own distinctive litany of pros and cons. External factors also come into play when deciding where to invest your money. Current market temperature, portfolio diversity, and even personal financial goals can all influence your investment approach.
properties, bonds — no matter what means of investment you choose, there are
always potential risks and rewards to consider before making a final decision.
However, some investment vehicles consistently outpace other options, helping
investors mitigate risk while optimizing overall return on investment. One consistently
reliable option for financiers? Real estate investment trusts.
REITs: What They Are and How They Differ From Traditional Stocks
Recent real estate and stock market trends have showcased the many significant benefits offered by owning shares in real estate investment trusts (REITs). Understanding what REITs are and how they differ from stocks can help you determine if it’s the right option for your existing portfolio.
REIT is a company that owns, operates, or finances large-scale, income-producing
real estate properties, such as:
REITs and stocks are both types of investments that can be purchased on stock
exchanges or through a broker, they work differently within the investment market.
REIT investors buy shares in a trust that owns and manages real estate
properties or mortgages. However, stock investors acquire shares in the
ownership of a public company.
Current Real Estate Trends Make REITs a Sound Investment
According to Forbes Magazine, residential and commercial real estate have yielded annual returns greater than 7% for investors over the past five years, indicating that now is the perfect time to invest in income-producing rental properties, such as REITs. While today’s current real estate trends alone make a strong case for REIT investment, a recent Marketwatch report reveals that REITs have actually outperformed stocks for more than 50 years.
fact, when considering worldwide financial assets, real-estate investments, on
average, have surpassed stocks by over a full percentage point every year since
1960. The study demonstrated that from 1960 to 2015, real estate proved a
stronger investment than stocks during recessions and economic expansions, and
during times of rising and falling inflation. The publication
also showed that even REIT market’s lowest-performing year was still better
than the stock market’s lowest-performing year.
REITs: A Proven, Consistent Investment Strategy
REITs’ best year outperformed the stock market’s best year, and collectively,
the REIT market had fewer years that recorded a loss of more than 10% than
stocks did. Put simply; real estate has proven a far more consistent investment
than stocks overall, over the past 50 years. While their performance has, of
course, varied over time, they have a long history of producing good returns.
Understanding The Differences Between REITs and Stocks
REIT and stock shareholders both receive income from their investments through
dividends, some stocks do not pay out gains. However, REITs have stringent
guidelines regarding money paid by a company to its owners that states at a
minimum of 90 percent of a REIT’s total taxable income must be dispersed
through dividends, and be taxed only once at the shareholder level.
also don’t pay corporate income tax, and they’ve outperformed corporate bonds
in recent years. And unlike bonds, REITs have the potential for longer-term
capital appreciation, making them a solid investment strategy for IRAs and
401(k) retirement accounts. Traditional stocks, on the other hand, pose higher
risks to retirement plans, as they’re more likely to be affected by market
performance and instability. Additionally, while both forms of investment can
provide a steady stream of income for investors, REITs earn money based on
contracted rent or lease payments and often prove a more reliable source of
income while held. Stocks require strategic buying and selling based on market climate.
REITs Offer Enhanced Diversification and Liquidity Compared to Stocks
REITs, much like traditional stocks, can be volatile. However, real estate
investment trusts can have a lower-than-average correlation with other areas of
the market, meaning that while they can be affected by large trends, they often
also offer greater diversification and liquidity than a traditional real estate
investment, such as purchasing a rental property, as they allow you to own a
share of many properties. Also, while real estate prices generally rise with
inflation, REITs often remain unaffected. By adding REITs to your investment
profile, you can increase the likelihood of reduced volatility, broader diversification,
and a more consistent source of income.
Southpace Properties today to learn more about the recent and long-term trends
of REITs investments.
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