How do you invest in REITs? Are they safe? Pros and cons? Where to find the best?

9 Replies

I'm thinking about investing in REITs, and from the little that I have heard, they sound too good to be true.  Guaranteed returns, nothing to manage, etc...  On the surface, they seem like a good way to create annual cash flow.

For those who invest in REITs, how do you go about discerning which ones are good and which ones are not?  

How does one get started in this type of investment?  Where do you find them?

Thanks!

@Kimberly Dawson  Hi Kimberly, I personally love REITs. They do seem too good to be true, but its not. Vanguard has unbeatable expense ratios. VGSLX is what I have, if you invest of 10k you will get a discount on their already low expense ratios, 0.10% for VGSLX. 

top ten holdings;

1Simon Property Group Inc.
2Public Storage
3Equity Residential
4Health Care REIT Inc.
5Prologis Inc.
6AvalonBay Communities Inc.
7Ventas Inc.
8HCP Inc.
9Boston Properties Inc.
10Vornado Realty Trust

$43 Billion dollars invested in over 138 different companies. Super passive awesomeness. And no, I don't get any proceeds if you take the plunge, I simply love Vanguards awesomeness :)

The chase for yield has pushed the prices up and yields down. They are a great way to lose money. The strong ones yields are very small and the high yielders called mREITs are mortgage backed securities and are extremely volatile. NLY is a good example of a high yielder. Vanguard has a good one from what I understand. Personally have lost more than I made with these so not pleased.

@Jeff S.  Stocks will always be volatile, regardless of the holding. VGSLX is an index fund to offset manager trading and volatility. It will nonetheless still be volatile. But a note to take into consideration, even in 2008, vanguards REIT index was still paying a 4% dividend. The higher the dividend the lower the growth normally. Apple isn't paying a 4% dividend and probably never will. Coca-cola on the other hand can only do so many things with their cash, so they always pay a dividend.  

I was under the impression REITs worked differently than stocks in that you're investment is to fund a project like building a mall or housing development, and you are paid dividends from the profitability of the project. If they work in a manner similar to stocks, in that you can money, and the returns are similar, what is their advantage?

@Kimberly Dawson  when interest rates increase these securities will drop like a rock. They are like all fixed income investments. If your investment is 10k and the yield is 4% that is what the market prices the security at. If rates rise and it is determined the yield should be 5% the security will be discounted to allow it a 5% yield. While your REIT is worth 10k when yielding $400 it will be worth 8k if the yield needs to be 5%. $400/5%=$8,000. You lost 2k in principal.

Bond funds, REITs, preferred shares etc.,  and even dividend stocks all have the same vulnerabilities. When rates rise the principal needs to be discounted and the opposite has held true for many years. Your bond funds (and the others mentioned) have gained value in addition to the interest earned because rates have fallen for so many years.

@Kimberly Dawson  You are in essence funding real estate ventures. When interest rates rise, your REIT will not necessarily lose money. Especially given the fact that most of the companies in the REIT are commercial properties on 15 year leases so on and so forth. A REIT is nothing like a fixed income security/bond. REITs don't have a maturation date for the money you invest like a bond/fixed income security.

VGSLX has performed at 11.92% yield since inception (2001) the dividend yield is separate from the return percentage. Keep in mind, if you invest in VGSLX and the value goes down because its volatile, in the time that you keep the fund in your portfolio, the price will increase once again at a higher level than when you initially invested. You only lose money when you sell shares at a loss. If you hold onto the shares for 25 years, the value will increase and decrease, but ultimately as the stock market has proven over time, it always goes up. 

And given that VGSLX is comprised of 138 major companies, the chances of all 138 companies going bankrupt are pretty much non-existent. If you think like Warren Buffet and have an investment horizon of forever, if you invest in index funds, and this particular REIT, you will have more money than when you started when its time to pass your investments along to the next generation. 

Are REITs a good deal? Finra thinks you should think twice:

http://www.finra.org/investors/public-non-traded-reit-tip-sheet

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