Yeah, I know. These days, crypto’s all the rage. But save for the occasional downturn, over the past 40-plus years, Wall Street finally came around to what BiggerPockets readers already knew—when it comes to wealth building, real estate is where it’s at.
In late 2016—after decades of being a trusted billionaire ace-in-the-hole investment—real estate finally debuted on the S&P 500 in the fall of 2016 as its own standalone sector, the first new addition of its kind in 18 years.
Sure, real estate, like any industry, has ebbs and flows. But unlike Netflix and Blockbuster, there’s no disruptive technology on the horizon threatening to wipe out the demand for shelter any time soon—and that’s a great sign for investors.
Even better, with apps like Robinhood, the barrier to real estate ownership is lower—and cheaper—than ever. You just download the app, search for a real estate stock, and click buy. (Here are five super stable REIT exchange-traded funds, per Investopedia.)
While dot-coms and cryptos come and go, it is this long-term view that makes real estate a favorite among the 1%. The bullet-proof business model of shelter isn’t the only reasons the billionaires love it. If you’re investing for long-term yield, here are seven great reasons why should add a REIT or two to your long-term portfolio.
7 Reasons to Consider Investing in REITs
1. You can rely on a bulletproof business model.
Whether there’s too-high rent, stingy lenders, or Millennials just staying home, the bottom line is this: The rental market isn’t going anywhere. And here’s the kicker: Barring a historically devastating earthquake or meteor hitting Earth, the value of the REIT is backed by a pool of income-producing assets.
In other words, even if the market tanks, the REIT will still make money as long as it collects its rent. And—if leveraged correctly—once the market recovers, they can always sell or refinance and reinvest the compounded equity. Now that’s fire.
2. You’re not threatened by demand-supply cycles.
Yes, REITs realize their revenue from rent. It’s awfully simple, but incredibly effective. Why so?
Let’s take a look at blue-chip, $900 billion giant Apple [APPL]. Its revenue stream are plentiful, yet the iPhone dominates, raking in 72% of total industry profits compared to Samsung’s 24%.
In essence, stock value is derived from projections alone and how well we think management can run the business. There’s not always tangible asset backing the stock.
Look no further than Blockbuster, a great pick in the early-2000s. Resting on a $5 billion market value at its 2004 peak, the Blockbuster model was built on late fees, a strategy easy for an out-the-box disruptor like Netflix to pick apart.
(Streaming? At IDSN speeds?! We just got Bluray, bro!)
Ten years after laughing Netflix out of the room, Blockbuster was out of business, its stock crashing to zero.
Related: Investment Face-Off: Rental Property With 6% Cap Rate vs. REIT With 8% Return
With real estate, as mentioned, there’s no Netflix-level disruptor on the horizon replacing the need for shelter any time soon.
3. Dividends can help make your money work for you.
By law, REITS are required to pay 90% of its earnings, which means one thing: cash flow, and lots of it.
These three mortgage REITS offered 10%-plus yields as of last fall, with one even climbing to an almost absurd 12%. As of 2015 (the most recent data available from NAREIT), REITs paid out nearly $50 billion in dividends, providing a juicy option for investors on the prowl for yield.
4. REITs offer stability.
One of the historical selling points of real estate has always been its stability, even as a sub-sector niche asset class (as far as the S&P was concerned).
Look no further than Minnesota-based HCP [HCP], a health care REIT with strong dividends, as covered by TheStreet.com last year:
HCP’s selling points include a nearly 6% dividend yield backed by 30 years of rising payouts, benefits from the HCR ManorCare spin-off expected to close this year, a reasonable valuation and no expectation of even one interest rate hike this year.
Need I say more?
5. They boast historical growth.
Since 1970, the REIT sector has grown from a $1.5 billion market cap to over $1 trillion.
Over the past 20 years, the sector’s produced a 10x multiple, jumping from $88.78 billion as of Dec. ‘96 (across 199 REITs) to $1 trillion-plus (224 REITs). The number from the 192 NYSE-traded REITs alone come out to $942 billion—hence its own index on the S&P.
Looking at the historical yield curve, those numbers should continue to climb robustly in the future.
6. REITs can print money—but they don’t have to.
One of the beauties of real estate is the ability to compound wealth quickly, picking up bigger and better assets, while adding to the balance sheet.
Related: 4 Reasons to LOVE Owning Real Property (Over Stocks, REITS & Notes)
But here’s the interesting thing: Even though REITs have the ability to leverage—a relatively safe play in real estate, if you know what you’re doing—publicly-traded equity REITs sport a relatively modest debt ratio of 32.1%, per Harvard Business Review.
By comparison, Twitter (36%), Home Depot (9.54x!) and General Motors (2.69x) all got the REITs beat in that department—despite real estate’s innate ability to support high debt levels.
With commercial banks, the people lending you money, you’re looking at an average debt-to-equity ratio of 2.2x. With low debt levels across the sector, you know that your REITs have a secret weapon it can use—should it need it.
The fact that it doesn’t is just another reason to love ‘em.
7. REITs know how to make money (revenue per employee).
One ratio I like to look at when comparing REITs to other stocks is the revenue per employee, a ratio indicating how much money management manages to squeeze out of every worker.
Here’s a list of three of the top tech stocks:
- Apple: $2.6 million
- Facebook: $4.4 million
- Alphabet (Google): $2.06 million
Now let’s take a look at three REITs, shall we?
- NorthStar Realty Finance: $9.8 million
- Lexington Realty Trust: $9 million
- SL Green: $1.4 million
Many well-funded tech startups churn through their burn before they even learn how to turn (a profit, that is). It all goes back to the simplicity of the business model; it only really needs humans to collect rent and maintain the premises.
There’s not a lot of bells and whistles, but it’s robust as all hell. And that’s ultimately what makes REITs as safe a bet as any.
Count me in.
Do you invest in REITs? Why or why not?
Weigh in below.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.