Yes, Crypto’s All The Rage, But Here Are 7 Reasons Real Estate Stocks Rock

by | BiggerPockets.com

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.

Buying Your First House? A Duplex Might Make Sense

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 

(Read a full top 20 here.)

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.

About Author

Philip Michael

Philip Michael is a real estate developer, entrepreneur, investor, and author of How To 10x Your Net Worth In 18 Months. He’s the founder of NYEG, former on-air host on SiriusXM and NuvoTV, and former national editor/content strategy director at Bisnow leading up to the company’s $50M sale. Follow Philip on Twitter at @Philip_Michael or @yfwtb on Instagram. Real estate investment analyzer HERE: gum.co/AXdeluxe

5 Comments

  1. Cindy Larsen

    Best explaination of why to invest in REITS that I’ve heard. Is there a down side?

    I tend to hate the stock market because of it’s unpredictability. Do REITS suffer from the same problem of having stock price change because of herd mentality reaction to either an actual event, or even, a comment by some pundit? Or are they immune to this lemming mentality, and trade based only on the actual valuation of their properties and how well they are managed? For example did your REITS react to the stock market event last week? ( as I understand it, the event was based on a comment about interest rates ). If anything was likely to affect REITS, that would be the kind of event that I would be concerned about. So, what happened to your REITS?

    • Darin Anderson

      Is there a downside? Yes. The same downside as any other stock in the stock market.

      REITs are stocks. The are susceptible to all the same things all stocks are. Their value is not stable based on the value of their underlying assets at all.

      NLY which was one of the REITs quoted in this article was off peak to trough 10% in the last 2 week dive from about 11.2 to 10.2. In mid December it was 12.1. In March it was 12.7. In 2013 it was almost 15. That’s a 30% drop in a 5 year value while the value of the stock market doubled over that time period.

      So yes, they have to pay out 90% of their profit in dividends, but that doesn’t do you much good if the value of the stock is losing everything it is paying out in dividends.

      That is just one example. I am sure there are REITs whose value has held well in the last few years, but may not continue to do so in the future.

      People should not get enamored with REITs simply because they are “real estate.” They have nothing in common with investing in real estate. They are merely a stock whose business happens to be real estate. But that is where the similarities between investing in real estate end.

      What is different?

      1. They have a bunch of overhead. Executives, managers, PR, securities compliance, etc. That eats into their profit.
      2. They are trying to make profit by managing billions of dollars invested in real estate. Recall that Warren Buffet said back in 2010 or so that he thought housing was a great place to invest but he had no way to effectively deploy enough capital at a reasonable price to make it pay off for his investments. The REITs have a similar if somewhat smaller problem than Buffet. Because of this, I believe most REITs over pay for well performing assets that are already at peak efficiency. They are not in the rehab business or the value add business. They are in the business of deploying capital in what they believe to be safe reliable real estate investments that generate a steady return on their investment. This takes away any advantage that might exist by the nature of being invested in real estate.
      3. Furthermore you are at the mercy of the wisdom of management. If they make poor investment choices your REIT will suffer considerably. If the market turns and they are heavily invested in mall properties while malls begin to close left and right, etc, then your REIT will get absolutely hammered.

      REIT’s are just a stock for a company that invests in real estate. They don’t have the benefits that doing your own investing does.

      If you want a REIT, buy a REIT, but don’t think it is comparable to investing in real estate yourself. It has nothing in common with it.

      • Cindy Larsen

        That was more or less what I thought about REITs when I looked into them a while back. I’ve pretty much decided to pull my 401k money out of the stock market into a solo401k and use that to invest in real estate. Of course, I’ like to pull out of the stock market at it’s peak… I wish had a crystal ball to figure out when that will be.

      • Philip Michael

        Good comment, Darin. It is fundamentally that, a stock. And will function and behave as such — public equity. Which isn’t impervious to public behavior.

        And I think you said it well when you said that it’s a publicly traded business whose business happens to be real estate. But when you look beyond that, there is something to be said for the stability of the business model.

        And obviously you want to look at the balance sheets, the portfolios and whatnot. With crypto, tech stocks, biotech, things of that nature (which is why I generally don’t like stocks), it’s very spec — you’re betting on management or the technology.

        Real estate is a super simple business model. You’re not just going to “pivot” like Snapchat from sexting to whatever it is now or like Netflix from delivery DVDs to OTT streaming.

        Add NOI (and its intrinsic relationship to valuation) to the equation and you have a downside “protection” you don’t find many other places than in commercial real estate.

        So that gives you a a tremendous amount of security from that vantage point. And that’s what I wanted to highlight with my post.

        Thanks for reading and commenting, Darin, very informative!

  2. Glenn F.

    Another unfortunate negative to REIT’s is taxes. You are taxed at your regular income rate. You can’t offset it with depreciation, business expenses, etc. That being said, it truly is passive. I guess there are pros/cons on both sides.

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