Instant diversification

A REIT is an entity that specializes in owning and operating properties that generate income. These properties might be commercial, like office buildings, warehouses or shopping malls; multi-residential like apartment buildings; or more left-field assets like data centers and cell towers.

While some REITs specialize in certain sectors of real estate, such as commercial properties, they still provide diverse investments because they hold different property types in different markets. You’re unlikely to find a REIT that only buys, say, single-storey shopping plazas in Chicago. By mixing assets and their locations, REITs provide a hedge against regional downturns that could otherwise damage their rental income.

And rental income is the name of the game for REIT investors, as the rent collected makes up the cash that the trust returns to investors as shareholder dividends. Even if the assessed value of a REIT’s properties falls for some reason, as long as rental income remains steady, your dividends should too.

REITs are similar to mutual funds, in that investors provide the money a REIT needs to grow and maintain its portfolio, and the trust rewards them for their investments with regular dividends. You can purchase shares in a REIT on a public market like the New York Stock Exchange, the same way you would any stock.

When making your picks, know there are three main types of REITs.

Equity REITs make up the majority of the market and even include some company names you may already be familiar with, such as Public Storage. Other high-quality commercial real estate options include Boston Properties (BXP) and Prologis (PLD).

Meanwhile, mortgage REITs or “mREITs” invest in mortgages or mortgage securities, and hybrid REITs invest in both mortgages and property assets.

Those three types can further be classified by their trading status and divided into publicly traded, publicly non-traded and private REITs.

Join Masterworks to invest in works by Banksy, Picasso, Kaws, and more. Use our special link to skip the waitlist and join an exclusive community of art investors.

Skip waitlist

The benefits of investing in REITs

REITs are popular — 83% of registered investment advisers recommend them to their clients, according to a 2021 study from Nareit, a national REIT trade association, and market research firm Chatham Partners.

And there are reasons for that. In addition to the baked-in diversification, something you don’t get when you purchase an individual property, REITs provide a few other benefits.

First, you won’t need to take on the headaches endured by many property investors. No maintenance, no repairs, no impossible-to-satisfy tenants. You get the financial benefits of being a landlord without the hassle.

Publicly traded REIT shares are also highly liquid. You can offload them as easily as any stock you might sell using a trading app on your phone.

The distributions paid out by REITs can help you increase your fixed-income returns and provide your portfolio with an added hedge against inflation, because when rental rates increase, so does a REIT’s income.

Mind the risks — including rising interest rates

Choosing a REIT isn’t always easy. You’ll want to find one with the right mix of assets and a strong management team that can consistently grow profits. That requires due diligence on your part.

The Securities and Exchange Commission reminds investors to be aware of the lack of liquidity of non-traded REITs. If you want to sell quickly, you may not be able to do so because those shares are not readily sold on the open market.

As for REITs sold on public stock exchanges, you need to approach a REIT investment the same way you would a dividend stock. The payouts might remain constant, but the share price is still subject to the whims of the market. There’s no guarantee that REIT shares will keep growing, or that they won’t take a sudden nosedive.

Another risk to be wary of involves interest rates. REITs typically don't perform well when interest rates rise. Investors often see an opportunity to purchase bonds and other forms of fixed income instead, which tamps down REIT demand and share prices.

The Federal Reserve announced another interest rate hike earlier this month, with more hikes expected over the course of the year, so U.S. REITs could be under increased pressure to keep performing well in the near future.

Get the latest personal finance news sent straight to your inbox with the MoneyWise newsletter.

— With files from Samantha Emann

Fine art as an investment

Stocks can be volatile, cryptos make big swings to either side, and even gold is not immune to the market’s ups and downs.

That’s why if you are looking for the ultimate hedge, it could be worthwhile to check out a real, but overlooked asset: fine art.

Contemporary artwork has outperformed the S&P 500 by a commanding 174% over the past 25 years, according to the Citi Global Art Market chart.

And it’s becoming a popular way to diversify because it’s a real physical asset with little correlation to the stock market.

On a scale of -1 to +1, with 0 representing no link at all, Citi found the correlation between contemporary art and the S&P 500 was just 0.12 during the past 25 years.

Earlier this year, Bank of America investment chief Michael Harnett singled out artwork as a sharp way to outperform over the next decade — due largely to the asset’s track record as an inflation hedge.

Investing in art by the likes of Banksy and Andy Warhol used to be an option only for the ultrarich. But with a new investing platform, you can invest in iconic artworks just like Jeff Bezos and Bill Gates do.

About the Author

Clayton Jarvis

Clayton Jarvis

Reporter

Clayton Jarvis is a mortgage reporter at MoneyWise. Prior to joining the MoneyWise team, Clay wrote for and edited a variety of real estate publications, including Canadian Real Estate Wealth, Real Estate Professional, Mortgage Broker News, Canadian Mortgage Professional, and Mortgage Professional America.

What to Read Next

Disclaimer

The content provided on MoneyWise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.