In the previous article we studies about what Real Estate Investment Trusts (REITs) are. We also understood that they have become remarkably popular in a very short span of time and that they have a place in virtually every portfolio in the United States. We also learned that this trend is fast spreading across the globe.
However, we did not fundamentally understand the factors that were underlying this Real Estate Investment Trust (REIT) boom. In this article, we have listed down some of the factors which make investing in these trusts lucrative and profitable! The advantages to investing in Real Estate Investment Trusts (REITs) are as follows:
Liquidity
Liquidity is the foremost reason that anyone would want to invest in REITs. Real estate as an asset class is known to have a good risk return profile. This means that it provides great returns and the risk of downside is not as high when compared to other investments.
However, real estate as an asset class has a significant drawback which is that it is highly illiquid. Investors who want to cash out on their real estate investments have to wait for weeks (if not months) to do so. This is where investing in Real Estate Investment Trusts (REITs) comes to the rescue.
The securities sold by REITs are listed on many exchanges across the world. As such they can be bought and sold like shares of a blue chip corporation! Therefore investors who put their money in Real Estate Investment Trusts (REITs) get the benefit of extremely high liquidity which was virtually unheard of in the real estate market.
Diversification
REITs provide the opportunity for diversification to small ticket real estate investors. Real estate investments require a significant financial commitment on the behalf of the buyer. As such, investors can only invest in a few places. Therefore, they are exposed to the risks and returns of those micro-markets. Anyone familiar with investing knows that putting all your eggs in one basket is a dangerous proposition. This is the reason many people believe that real estate is an extremely risky proposition.
However, Real Estate Investment Trusts provide an opportunity to diversify this risk. This is because these trusts own a wide variety of properties. They own apartments, condos, offices, retail establishment etc and they own these properties in different markets. As such, they have sufficient diversification to protect themselves from the risks any one micro-market may present. This is what has made REITs a preferred choice for many investors.
Choice
REITs provide a lot of choice to individual investors. There are various types of trusts which are catering to the needs of diverse investors. There are some Real Estate Investment Trusts (REITs) which invest exclusively in equity. This means that they buy the properties outright and therefore gain from the cash flows and capital appreciation that these properties provide in the long term. Their returns however are variable and are subject to the vagaries of the market.
On the other hand, Real Estate Investment Trusts (REITs) also offer a debt based investment opportunity. Such funds loan out to real estate developers. These developers then pay a fixed return on the loans which is passed on the investors of the fund. Therefore, Real Estate Investment Trusts have opportunities for risky as well as risk averse investors. By buying a combination of debt and equity based REITs one can create any risk-reward portfolio which is to their liking!
Predictability
Real Estate Investment Trusts provide a lot of predictability compared to other investments. The underlying investment made by REITs is in real estate. Real estate as an asset class has a very predictable rate of appreciation as well as rates at which rentals grow. Therefore, the cash flows from such a fund can be predicted with a high degree of accuracy and certainty.
Most Real Estate Investment Trusts (REITs) in the United States confirm to analyst projections of their revenues and expenses year after year. This has given analysts the confidence that they can predict the cash flows with a high degree of confidence.
If the records for the past few years are considered, Real Estate Investment Trusts (REITs) have consistently outperformed the stock markets and they have done so with a high degree of certainty. Less volatility and higher returns makes REITs a favorite!
Professional Management
Lastly, Real Estate Investment Trusts are businesses that are run by well qualified professional investors. As such, they have their methodologies in place and make decisions based on them.
It is highly unlikely that the management of Real Estate Investment Trusts makes erroneous decisions regarding managing any given property. This professional management is worth a lot of money and individual investors would simply not be able to afford it and the increased cash flow that it brings to the table.
Since a lot of investors pool in money and each of them only has to pay a slice of the management fee, they can benefit from the financial and operational expertise that many of these real estate investors bring to the table.
