On REITs, Part I

REIT - A acronym I’ve heard on Bloomberg News.
REIT - Something my brother-in-law told me to buy in 2012.
REIT - An institutional investment vehicle.
REIT - An institutional investment vehicle with interests in real estate.
REIT - Real Estate Investment Trust

Investopedia defines Real Estate Investment Trust:

A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.

I am a REIT investor, I am also a real estate investor. I don’t think of the two in the same category. Here is my attempt to explain why:

REITS

In both my retirement and taxable portfolios, REITs make up a little less than 9% of my total holdings. As an asset class, this is a smaller percentage, especially when you look at the split being about 60/40 domestic vs. foreign REITs. In other words: 6% of my portfolio is held in Domestic REITs and 4% in foreign REIT interests.

NUMBERS

In the last 3 years, REITs and particularly domestic REITs have performed immensely well. In the last year alone, both my domestic and foreign REIT funds have grown 24.79% and 16.34% respectively. In the last three years, both are much closer to 40% and 30% in gain. Both have paid healthy SEC dividends always north of 2.5%.

It should go without saying that this past year has been tremendous for REIT investments. It has also been tremendous for the S&P 500. Most corporate stock gains happened in the few years prior to 2014-15, and REITs have been largely trailing them. Given that, it’s also probably not the greatest time to get into REITs: they’ve got nowhere to go, but down.

Despite all their success, and despite my happiness with buying REITs in 2011 (when nobody suggested such investment vehicles), I do not consider it part of my real estate investing:

REIT - No physical assets in an interest I control
REIT - No use of leverage… OPM Denied!
REIT - Institutional bloat
REIT - Institutional risk

Sure you have physical assets. They are held by the company!

Not really. I don’t have a great grasp on baseline value. Not to mention the fact that in a liquidation scenario, the company would have obligations to pay unrelated to my own.

I cannot control the ethics of the management, the ethics of other owners, the strategies pursued. I cannot assure that my REITs are not tackling bubble or unsustainable markets.

You can use leverage. Trade on margin!

The return value on a bad institutional asset can be close to 0. When my debt collectors come, I want to have something to put in their hands. As a person, who lives under a roof, I recognize the intrinsic value of a home.

I want to use other people’s money. It’s one of the best aspects of real estate investing.

Also, I don’t recommend trading on margin, in any case.

Institutional Bloat

REITs have overhead: expenses, salaries, compliance, taxes, and the list goes on. I can assure you this is larger part of my investment than the 20% (+/- 10) I pay out yearly for maintenance and expenses on a single family home.

Institutional Risk

I didn’t buy a house in a good neighborhood with good demand. I bought shares of a company that is subject to the usual risks of the business cycle. Let’s call this what it is, but it’s very different than owning a single asset or even several assets that are protected from one another (check out BP podcast 109 for more on that).