I’ve always been under the impression that apartment building REITs are a safer investment than REITs focusing on commercial spaces because the economy ebbs and flows, but people will always have to live somewhere. To me, a residential REIT is just a way to own (slices of many) apartment buildings without the unpleasantness of collecting rent and unclogging toilets.
But I just read this paragraph on this site, talking about one residential REIT:
When you invest in a REIT you are giving someone your money so that they can make risky decisions with it. You take all the risk and they get most of the rewards. Instead of putting money in a REIT I would just buy property directly and manage them yourself. That would be the safest real estate investment IMHO.
Assuming the REIT is managed well, Residential should be the safer investment. Commercial is riskier, but you can make more money from commercial investments.
The “but people will always have to live somewhere” is quite ignorant.
The elasticity of the local housing market is important. If the local economy starts having a little bit of a problem some places get a couple extra vacancies. They cut their rent to draw in people. Others have to follow suit, etc.
Some areas are more resistant to this problem and others not at all. One indicator is how fast have rents gone up in recent years. Those are the ones to have the biggest drop if there’s a small economic crunch. (A lot of people made a lot of money in the housing market in ND during the fracking boom. Now, not so much.) But there are also counterexamples.
You need big picture analysis. E.g., is the area growing in population but there are limits on how many new housing units are being added? (E.g., SF, Portland and Seattle are like this.) But then maybe the cost to get into the market is already too high.
Economics doesn’t ever have a reliable get rich quick method.
One potential advantage of REITs is it’s akin to an industry-specific mutual fund in terms of diversification.
A REIT that only invests in apartments in Spokane is totally exposed to the exigencies of the Spokane market. As explained by ftg just above. One that invests across the entire US is vastly more diversified. It’ll *tend *to have less volatility in both directions. Investing in a single duplex in whatever town that you manage yourself is the polar opposite of diversification.
Whether real estate is a good industry to invest in in 2017 versus, say pharma, manufacturing, airlines, banks, or overseas is a separate question. My personal crystal ball leads pretty directly to losses in most cases so I won’t share its predictions here.
Not sure how to take this. Weyerhaeuseris an REIT (of timberlands mostly). So if you want to indirectly invest in an REIT, Weyerhaeuser is an option. Got that.
But … (!)
There is no “next” Seattle building boom. It is in a building boom. But not so much for traditional single family frame buildings (unless you’re talking about way outside Seattle)*. Apartment buildings and such don’t need a lot of wood per unit.
Hmm. Maybe there are doing a lot of those awful lot splittings in town. Buy a single family place, tear it down, put up two (or more!) homes in it’s place. They’re doing a lot of that in Portland and it’s destroying neighborhoods. Tiny homes don’t need a lot of wood per unit either. Esp. these cheapo ones.
This is blatantly incorrect. A single property is much higher risk than a small ownership stake in a large corporation that owns a bunch of properties.
It’s also not a reasonable choice for many people since it’s much less liquid and requires a substantially larger chunk of capital to start.
Even if you can afford to buy a house, and have the wisdom to manage the property wisely, you’ve still got all of your eggs in one basket, and factors beyond your control can destroy that basket. For example, suppose that one house ends up basically unrentable because the house next door gets turned over to a slumlord who insists on renting to meth manufacturers, or a freak windstorm/earthquake/flood damages the house and the insurance company decides to sit on your claim for months or years–you might be out of luck, or merely have a lengthy period with no income and lots of outgo. A good REIT spreads the risk around, with enough good income-producing properties to offset the problem properties, or the ones temporarily affected by economic/environmental factors.
As far as the OP’s question, though, there’s no one right answer. What kind of commercial property, e.g., and where? retail? office space? hotels and resorts? A REIT focusing on professional office space (doctors, lawyers, etc) in retirement meccas has an entirely different risk profile than one focusing on big-box retail properties in the Rust Belt. A residential REIT that focuses on single-family homes in the Southwest doesn’t face the same challenges as one focused on student housing at public universities.
Even a poorly-managed REIT isn’t likely to have all of its properties next door to drug dens, though; with anything more than token geographic dispersion, they’re not all going to be taken down by the same storm or earthquake or wildfire. If the REIT owns 1000 properties and 500 of them get washed away, blown up, or left to rot, they’re still at 50%. If you own one superbly-managed and carefully chosen property that runs into problems, you’re at 0%.
A single property has a greater upside than a REIT with uncertain management, but it also has a greater downside. That’s risk, which is the opposite of safety.
In the past there have been REITs that were little more than barely legal Ponzi schemes. Perhaps Lakai invested in one of those and was duly burned.
I don’t see too much functional difference between REITs and sector-specific mutual funds. In each case you’re trusting the managements of the fund and/or of the underlying company(ies) to not simply be strip-artists but rather to be trying honestly to run a successful ongoing business.
Due diligence applies to buying shares of IBM, broad-based mutual funds from Vanguard, sector-specific funds or ETFs, REITs, or the duplex at 123 Elm Street in Yourtown USA.
REITs, like other PTPs, do have some specific regulatory / tax issues an investor needs to be aware of. That is a real distinction that makes a real difference between a REIT and a sector fund. If our OP is to the point of choosing *between * various REITs I’d hope he already understands these special features.
I like commercial REIT’s. You shouldn’t assume they’re going to make you rich quick, but I bought Realty Income (O) back in 2003 and the annualized return on that as of 12/31/2016 was 15.1%. That’s with dividends reinvested. It’s currently worth 7 times what I paid for it and every year it generates dividends worth 30% of the original investment.
Digital Realty Trust just about doubled in value since I bought it in 2013. That’s an annualized return of 24.43% per year.
Both of these invest in commercial properties. Realty Income’s top four tenants account for 25% of their income and are Walgreens, Fedex, Dollar General, and LA Fitness, so a pretty well diversified portfolio. Digital Realty is less diversified, being solely invested in data centers and cloud services, but absent a Carrington Event I don’t think the internet is going away.
It’s not all gravy though, it depends on your tax situation. They pay ordinary dividends as a lot of it is carried as a return of capital, so they’re not subject to the more generous tax treatment of qualified dividends. YMMV, consult your tax professional, do your due diligence.
No, it doesn’t. Buying shares in a REIT is not without risk, but it is unequivocally less risky than buying a single property. You’re just wrong about this.
If you can’t afford to buy a house but want exposure to the real estate market, a REIT makes sense.
I can afford to buy a house but don’t want to be limited to owning property in a single geographic location. That’s a real lack of diversification. I own a REIT that owns property in 49 states and Puerto Rico. I can’t afford to own 50 different rental properties, and I don’t have the time to manage them if I did have the money, but for less than the price of a single house in my neighborhood I can have a piece of the action in nearly every state in the union. Again, the tax advantages are less than owning real property, but the risk is far lower.