How to Play It

Investors have long since looked to commercial real estate for its attractive wealth-building characteristics, such as its stable income stream and potential for capital growth. REITs provide a simple way to invest in real estate while also offering benefits that are not available through direct property investment. This includes liquidity and the ability to build a globally diversified real estate portfolio.

Since 2001, global real estate securities have outperformed many other major asset classes, including the broad equity market, as well as investment-grade bonds and commodities. This reinforces the view that REITs offer a meaningfully different return profile from other asset classes, warranting their own separate strategic allocation in a well-balanced portfolio.

By buying into investment-quality REITs, investors large and small have been able to earn total returns averaging at least 10%-12% annually, with steady income, low market-price volatility, and investment safety all wrapped up in one valuable package.

Thanks in large part to technology, REITs have gained both prominence and popularity. You can now read about them on websites such as Forbes.com, Seeking Alpha, The Motely Fool, and TheStreet. However, being a do-it-yourself (DIY) investor can be overwhelming, not to mention time-consuming.

Many investors find that using a financial planner or investment adviser has its advantages, primarily because of the personal attention given to clients and the customization of clients’ portfolios based on their tax situations.

Other ways to access REITs include the following…

REIT Mutual Funds

Mutual funds generally have a higher minimum investment requirement than exchange-traded funds (ETFs). Those minimums can vary depending on the type of fund and company. They are actively managed by a fund manager or team that makes decisions to buy and sell stocks or other securities within that fund in order to beat the market and help their investors profit.

These funds usually come at a higher cost because they require a lot more time, effort, and manpower to run.

There are two legal classifications for mutual funds.

1) Open-ended funds dominate the mutual fund marketplace in volume and assets under management. There’s no limit to the number of shares the fund can issue, and the value of an individual’s shares is not affected by the number of shares outstanding.

2) Closed-end funds issue only a specific number of shares. They do not change that limit as investor demand grows.  

There are many mutual funds that specialize in REITs. But the best way for most investors to gain broad exposure is to consider Cohen & Steers Realty Shares (CSRSX) that had 45 holdings and $4.3 billion under management as of January 31, 2020.

A list of all REIT mutual funds can be viewed HERE.

REIT mutual funds provide an excellent way for individuals to obtain sufficient REIT diversification.

Even active investors might want to invest a minimum amount in some of these funds in order to benchmark their personal REIT investment track records and get a window on what institutional investors are doing.

Of course, there are trade-offs to consider in this regard, such as the average 1.25% in management fees you have to pay of your total assets and expenses (e.g., accounting and legal costs that are paid indirectly through reduced dividends). Also, these funds are not customized, so the individual investor’s tax profile, among other things, is not automatically aligned with the fund’s strategy.

REIT CEFs

A closed-end fund (CEF) is organized as a publicly traded investment company by the SEC. Like a mutual fund, a CEF is a pooled investment fund with a manager who oversees it. As such, it will charge an annual expense ratio to cover the costs involved before the investor begins to see performance kick in.

CEFs start out by raising a fixed amount of capital with a fixed amount of shares through an initial public offering (IPO). They are then structured, listed, and traded like stocks on a stock exchange, where they can make income and capital gain distributions to shareholders.

CEFs have several unique attributes. Unlike regular stocks, they represent interest in specialized portfolios of securities that are actively managed by investment advisors and typically concentrate on a specific industry, geographic market, or sector.

The stock price of a CEF fluctuates according to market forces, such as supply and demand, as well as the changing values of the securities in the fund’s holdings.

As of January 31, 2020, one of the largest CEFs focused on REITs was the almost $1.53 billion Cohen & Steers Quality Income Realty Fund (RQI).

REIT ETFs

Recognizing that there are quite a few “average Joe” investors out there who are limited in the amount of time and/or money they have to build their own basket of REITs, iREIT proudly provides research on over 30 REIT exchange traded funds.

An ETF is an easily tradable fund full of investments that fall under the same umbrella, whatever that umbrella might be. This means you get a piece of the profit across an array of companies, products, indices, or sectors, while limiting your risk. If one holding within the ETF starts to struggle, the larger fund’s price should be propped up by all the other holdings.

ETFs are also popular among retail investors and financial advisers. They are simple to explain to clients, and allow professionals to blame any negative price changes on index movements instead of their own stock-picking ability.

To be sure, an ETF will always perform in line with the index it’s tied to. Plus, the adviser can charge additional fees on top of the ones directly tied to the fund itself.

It’s also important to note the difference between index underperformance and underperformance from asset allocation. An ETF’s portfolio can underperform due to misallocation between sectors or asset classes on the part of financial advisers. Incidentally, since there typically isn’t noticeable index underperformance in an ETF’s portfolio, there’s less of a chance of incompetent advisers being fired.

A list of most REIT ETFs can be viewed HERE.