To REIT Or Not To REIT: That Is The Real Estate Investing Question

In theory, REITs have a lot of appeal.

• They offer hefty dividend yields, by distributing 90% or more of their income to shareholders.
• They are much more liquid than other real estate investments.
• And they provide diversification from the stock market.

Plus, they are a completely passive form of real estate investing.

That means:

• No 3 AM calls from tenants
• No dealing with contractors for repairs
• No evictions, etc.

Unfortunately, many REITs have let investors down over the past few years.

For example, the median 3-year CAGR among residential REITs is about 7% to 8%. Ordinarily, that might be an acceptable return. But this was during one of the greatest housing booms in recent history!

According to FRED data, the median sale price of a U.S. home rose by nearly 9% during the same time period. And that is an unlevered return. Depending on the size of the downpayment, a levered return might be 3 to 5 times as high.

So, does that mean all REITs are bad investments?

Not, of course not.

There are still some high-performing REITs that have outperformed the market. But they are getting harder and harder to find...

Of the 108 REITs with a $1B+ market cap, only 30 have a positive return over the LTM. And only 21 (19%) have eclipsed the rate of inflation.

And none of those 21 REITs have a 'buy' rating from more than one of the equity research firms that we screened (Argus, McLean, Trading Central, and Zacks).

REITs simply haven't enjoyed the same appreciation as other asset classes during this year's bull run. But there are other ways to make money in real estate... if you're willing to get your hands dirty.

Especially in residential.

Despite the increase in interest rates, the housing market is still holding strong.

In fact, houses are selling faster today than they were pre-COVID (during the zero-interest rate days). Owners don't want to let go of their sub-4% mortgages. And Wall Street is already predicting rate cuts in the next 24 months.

Unless a wave of new builds comes on the market soon, the residential space might be poised for another leg up.

So the only question is: To REIT or not to REIT?

For maximum gains, your best bet is to buy a cash-flowing property with tailwinds and a modest amount of leverage. You may even get to refinance at a lower rate in the coming years.

However, if the thought of fixing toilets or dealing with tenants makes you cringe, you may consider investing in a REIT. Just be sure to remember the opportunity cost of remaining passive.