{"id":182443,"date":"2025-04-28T18:56:00","date_gmt":"2025-04-29T00:56:00","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=182443"},"modified":"2025-04-29T07:10:00","modified_gmt":"2025-04-29T13:10:00","slug":"reits-at-risk-of-decline-but-present-buying-opportunity","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/reits-at-risk-of-decline-but-present-buying-opportunity","title":{"rendered":"REITs Might Be in Jeopardy\u2014But It’s Hard to Pass Up This Huge Buying Opportunity"},"content":{"rendered":"\n

The tempest of tariffs, trade wars, inflation <\/span>fears<\/span>, and recession fears have dizzied investors for the last three months. Where should investors put their money to protect against all this risk? <\/span><\/p>\n\n\n\n

I\u2019ve outlined a few <\/span>recession-resilient real estate investments<\/span><\/a> I like, but let\u2019s dig deeper into REITs. Real estate investment trusts offer the easiest way to <\/span>invest passively in real estate<\/span><\/a> since you can buy shares with your brokerage account. They also come with their share of downsides and risks, which we\u2019ll touch on later.  <\/span><\/p>\n\n\n\n

REITs & Recession Risk<\/span><\/h2>\n\n\n\n

Let\u2019s get this out of the way now: REITs crash before and during recessions. And they crash hard, with an <\/span>average return of -17.6%<\/span><\/a> during recessions going back to 1991:<\/span><\/p>\n\n\n\n

\"\"
Neuberger Berman<\/a><\/em><\/figcaption><\/figure>\n\n\n\n

That said, REITs respond to market changes much faster than private property prices because REITs <\/span>are publicly traded<\/span>. You can see that play out in the data. <\/span><\/p>\n\n\n\n

In the average four quarters <\/span>before <\/span><\/em>recessions, <\/span>REITs have underperformed<\/span><\/a> privately owned properties:<\/span><\/p>\n\n\n\n

\"\"
REIT.com<\/a><\/em><\/figcaption><\/figure>\n\n\n\n

But in the four quarters <\/span>after <\/span><\/em>recessions, REITs have beaten privately owned properties:<\/span><\/p>\n\n\n\n

\"\"
REIT.com<\/a><\/em><\/figcaption><\/figure>\n\n\n\n

The data is <\/span>clear<\/span>: Once a recession strikes and REIT prices dip<\/span>, historically<\/span>, that\u2019s a great time to buy.<\/span> <\/span><\/p>\n\n\n\n

Specific REIT Sectors That Shine in Recessions<\/span><\/h2>\n\n\n\n

Some types of REITs do just fine in recessions. Others ride the struggle bus downhill. <\/span><\/p>\n\n\n\n

Specifically, <\/span>Wide Moat Research<\/span><\/a> points to REITs specializing in healthcare, data centers, and triple net leases as survivors in recessions. On the other end <\/span>of the spectrum<\/span>, the company warns investors that hotels, billboards, and mortgage REITs suffer. <\/span><\/p>\n\n\n\n

In fact,<\/span> it cites research that if you remove mortgage REITs from the data, equity REITs <\/span>actually<\/span> average an annualized return of 15.9% during recessions. Not too shabby!<\/span><\/p>\n\n\n\n

How REITs Have Moved Recently<\/span><\/h2>\n\n\n\n

After a flash crash early in the COVID-19 pandemic, REITs skyrocketed until early 2022, when the Federal Reserve started hiking interest rates. That hasn\u2019t gone well for REITs.<\/span><\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

The <\/span>annualized price returns for U.S. REITs<\/span><\/a> have averaged -7.29% over the past three years. Meanwhile, the price return for the S&P 500 has averaged nearly 8%.<\/span><\/p>\n\n\n\n

And no, the numbers don\u2019t <\/span>get much better<\/span> when you include dividends. <\/span>The net total return for U.S. REITs has averaged -4.69% <\/span>a year in that period<\/span>, while the S&P 500 has averaged 9.14%.<\/span>  <\/span><\/p>\n\n\n\n

More recently, U.S. REITs shot up last year when interest rates started declining. But they\u2019ve crashed <\/span>back down<\/span> again <\/span>over the last<\/span> two months of tariff turmoil, falling 7.6%.<\/span><\/p>\n\n\n\n

Volatility<\/span><\/h2>\n\n\n\n

As publicly traded assets, REITs bounce around with almost as much volatility as stocks. <\/span><\/p>\n\n\n\n

You can measure volatility with beta. The <\/span>beta of U.S. REITs<\/span><\/a> compared to the S&P 500 is 0.75\u2014in other words, REITs are 25% less volatile than stocks. <\/span><\/p>\n\n\n\n

Privately owned real estate has a far lower beta. The less liquid an investment is, the lower its volatility <\/span>tends to be<\/span>. <\/span><\/p>\n\n\n\n

Correlation to Stocks<\/span><\/h2>\n\n\n\n

I invest in real estate for many reasons: cash flow, tax advantages, long-term appreciation, and the<\/span> ability to leverage other people\u2019s money. But just as important to me as all of those is diversification. I invest in real estate as a counterweight to my stock portfolio. <\/span><\/p>\n\n\n\n

Therein lies one of the <\/span>biggest<\/span> problems with REITs<\/span><\/a>: They correlate too closely with the stock market <\/span>at large<\/span> and act as just one more sector of it. <\/span><\/p>\n\n\n\n

Check out<\/span> the <\/span>full<\/span> graphs and data on <\/span>REITs\u2019 correlation to the stock market <\/span>here<\/span><\/a>.<\/span> I generally avoid REITs for this reason.  <\/span><\/p>\n\n\n\n

Other Passive Real Estate Investments I Prefer<\/span><\/h2>\n\n\n\n

Like the idea of a completely hands-off real estate investment, but don\u2019t want REITs\u2019 volatility and correlation to stock markets? <\/span>Me too.<\/span> <\/span><\/p>\n\n\n\n

I <\/span>get together<\/span> with a group of other passive investors <\/span>every month<\/span> through a co-investing club to vet a new investment.<\/span> Each person can invest $5,000 or more<\/span>, and collectively<\/span> we\u2019ll surpass the $50,000-$100,000 minimum.<\/span> <\/span><\/p>\n\n\n\n

Here are a few types of passive investments that we go <\/span>in on<\/span> together.<\/span> <\/span><\/p>\n\n\n\n

Private partnerships<\/span><\/h3>\n\n\n\n

Often, we\u2019ll partner with an active investor on a deal or series of deals. <\/span><\/p>\n\n\n\n

For example, last month we partnered with a land-flipping company. <\/span>They\u2019ll flip as many parcels as <\/span>they can<\/span> with our money between now and the end of 2027 and pay us <\/span>out<\/span> our profits each time a parcel sells.<\/span> <\/span><\/p>\n\n\n\n

We made a similar partnership with a house-flipping company last fall, and with a spec home construction company. I <\/span>personally<\/span> love <\/span>private partnerships<\/span><\/a>.<\/span><\/p>\n\n\n\n

Private notes<\/span><\/h3>\n\n\n\n

Likewise, we love investing in private notes for steady and predictable income. In our club, we typically go in on secured notes <\/span>paying<\/span> 10%-16% interest. <\/span><\/p>\n\n\n\n

Real estate syndications<\/span><\/h3>\n\n\n\n

Some people find syndications intimidating. Don\u2019t let them scare you. One of the reasons we love investing as a club is that we can all vet these together. It lowers the risk when you have 50 sets of eyeballs, all reviewing a deal and discussing it together on a Zoom call. <\/span><\/p>\n\n\n\n

The bottom line:<\/span> You get the cash flow, appreciation, and tax benefits of owning real estate without <\/span>having to become<\/span> a landlord. <\/span><\/p>\n\n\n\n

Buy REITs Right Now?<\/span><\/h2>\n\n\n\n

Now isn\u2019t a bad time to buy REITs, all things considered. But I\u2019d still rather invest privately. <\/span><\/p>\n\n\n\n

If you insist on timing the market\u2014which I don\u2019t recommend\u2014the best time to buy REITs tends to come in the darkest days of a recession. \u201cBlood in the streets\u201d and all that. <\/span><\/p>\n\n\n\n

Of course, everyone\u2019s still panicking then, so no one feels like buying. You won\u2019t want to buy, either. <\/span><\/p>\n\n\n\n

That\u2019s why I practice <\/span>dollar-cost averaging for real estate investments<\/span><\/a>. I invest $5,000 in a new real estate deal every month, rain or shine, rainbow or recession.<\/span><\/p>\n\n\n","protected":false},"excerpt":{"rendered":"

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