Feeling ready to step away from the traditional investing formats of 401(k)s with your employer? The real estate market is a favorite for many people who feel that way. But if you’re wary of dealing with the intricacies of ownership, know that you don’t have to put money into properties by purchasing them directly. Investing in Real Estate Investment Trusts (REITs) can be hugely rewarding and a much simpler investment, especially if you can find good REITs to invest in.
Although so far in 2022 REIT performance has been driven by secular macro trends and rotation (hotel and office REITs performing well, cell tower and high-growth REITs in bear-market territory), you can still find strong pockets in the industry to generate market-beating returns for 2022.
The REIT path to real estate investment is closer to trading stocks, except that all of these assets connect to physical property, and the fate of the real estate will also dictate the stock’s success.
Different kinds of REITs include mortgage, retail, healthcare, residential, and office REITs. Each has advantages and disadvantages that tie directly into their assets’ location and ability to return a profit. Specifically, the housing market can impact some of these REITs.
Good REITs to invest in focus on favorable housing markets
The REITs most impacted by housing markets are mortgage and residential REITs. Residential REITs often take the form of multifamily units held by a trust. These REITs depend on their location and quality markets where the demand for housing is excessive, and thus rent can be higher.
A mortgage REIT is an investment in the actual mortgages that lenders give out to homeowners. These are more impacted by the state of the economy and the housing market. Mortgage REITs were understandably the REITs to take some of the biggest hits in the housing market crash of 2008.
The primary danger with mortgage REITs is in creditors defaulting on their loans. Thus, trouble in the economy, rising unemployment rates, and general income troubles in any sector are signs the defaults could rise.
Good REITs to invest in should avoid higher levels of risk
With the default risk attached to mortgage REITs, they tend to be the higher-risk investments in the REIT market. While that’s something to be aware of, there are lower-risk mortgage REITs that exist as well. Agency loans are backed by the government, and they are therefore free of the default risk, making them options for good REITs to invest in if you worry about risk and volatility.
Non-agency loans are not government-backed and are not protected in the same way, but (as is the case with most investments) they have an opportunity for more growth that comes with the added risk.
Typically, the idea of getting involved in real estate is to add assets to your portfolio that are tied to something physical that will hold its value, but REITs don’t quite fit into that category. The closest thing would be those that are dependent upon rent, such as office REITs and residential REITs. Everything comes with its own set of risks, and you need to be aware of how they look in the REIT markets.
What types of REITs are you most interested in investing with right now, and for what reasons?