Is REIT better than bonds?
REIT Benefits to Investors
Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.
With rate cuts on the horizon, dividend yields for REITs may look more favorable than yields on fixed-income securities and money market accounts. However, REIT stocks are only as good as the properties they own — and some real estate sectors may be better positioned than others.
Like bonds, you typically earn a fixed interest rate. That leaves your returns vulnerable to inflation, but secured loans against real estate tend to pay far better than bonds, so inflation eats less of your return.
Key Points. REITs have outperformed stocks on 20-to-50-year horizons. Most REITs are less volatile than the S&P 500, with some only half as volatile as the market at large.
REITs allow investors to pool their money and purchase real estate properties. By law, a REIT must pay at least 90% of its income to its shareholders, providing investors with a passive income option that can be helpful during recessions.
Stocks and REITs are not guaranteed and have been more volatile than bonds. Stocks provide ownership in corporations that intend to provide growth and/or current income. REITs typically provide high dividends plus the potential for moderate, long-term capital appreciation.
Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them. Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.
April 2, 2024, at 2:50 p.m. Real estate investment trusts, or REITs, are a great way to invest in the real estate sector while diversifying your options. Real estate investments can be an excellent way to earn returns, generate cash flow, hedge against inflation and diversify an investment portfolio.
But since REITs are invested in property, there's more protection against the horror show of having shares crash to $0. By law, 75% of a REITs asset must be invested in real estate. The market value of the property owned by the REIT offers a bit of protection, as long as the value of the property doesn't go to zero.
Is there a better investment than bonds?
Stocks offer the potential for higher returns than bonds but also come with higher risks. Bonds generally offer fairly reliable returns and are better suited for risk-averse investors.
The answer to the question depends on people's unique circ*mstances and goals. Someone seeking passive income without too much hassle will clearly opt for treasury bonds. On the other hand, someone wishing to build long-term term wealth with some reasonable capital may opt for real estate.
Compared to real estate, bond returns receive devastating blows with inflation, and yield small returns with an intangible investment. If you are seeking investment opportunities and are serious about making your money grow the farthest, consider real estate over bonds.
While a REIT is still open to public investors, investors may be able to sell their shares back to the REIT. However, this sale usually comes at a discount; leaving only about 70% to 95% of the original value. Once a REIT is closed to the public, REIT companies may not offer early redemptions.
REITs provide a much simpler way to invest in real estate and earn consistent income through dividends, but they confer less control, and their upside tends to be lower than that of rental properties.
After lagging equities the past two years, REITs offer an attractive investment opportunity in 2024. The headwind of higher bond yields and central bank rate hikes is likely to abate and may turn into a tailwind if our view about an impending economic slowdown and decelerating inflation trends is correct.
Does Warren Buffett invest in REITs? The short answer is yes. Berkshire Hathaway does allocate capital real estate ownership throughout REITs.
REITs have been wealth-creating machines over the years. Realty Income, Equity Lifestyle, and Prologis have all outperformed the S&P 500 over the long term. These well-built REITs should continue enriching their investors in the future. They have the potential to turn long-term, consistent investors into millionaires.
“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.
Finally, a REIT is not a pass-through entity. This means that, unlike a partnership, a REIT cannot pass any tax losses through to its investors. Consider consulting your tax adviser before investing in REITs.
Are REITs more like stocks or bonds?
REITs generate a steady income stream for investors but offer little capital appreciation. Most REITs are publicly traded like stocks, which makes them highly liquid, unlike real estate investments.
Do REITs Have High Leverage? In some cases, REITs use lots of debt to finance their holdings. Some trusts have low amounts of leverage. It depends on how it is financially structured and funded and what type of real estate the trust invests in.
The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37% (returning to 39.6% in 2026), plus a separate 3.8% surtax on investment income.
The FTSE Nareit All REITs index, which tracks the performance of all publicly traded REITs in the U.S., had an average annual total return (dividends included) of 3.58% during the five-year period that ended in August 2023. For the 10-year period between 2013 and 2022, the index averaged 7.48% per year.
Summary. REITs have access to capital and are acquiring assets, making it a good time to invest. REITs historically rebound when interest rates pivot and have the potential for rent growth.
