The Census Bureau recently reported that U.S. homeownership for the second quarter of 2015 was at its lowest level since 1967.1 This suggests many Americans may not be able to afford to buy property.
But there is a way to invest in this trend: real estate investment trusts (REITs). REITs are essentially companies that purchase or finance real estate and have structures somewhat similar to mutual funds—except investors purchase shares of stock in a REIT on major stock exchanges or through private offerings.2
Most REITs are equity focused, meaning income is earned from rent or sales.3 The remainder are considered mortgage focused because they invest in mortgages or mortgage-backed securities. REITs are available across a wide range of real estate asset classes, including office space, retail, multi-family units, lodging, healthcare, and industrial.
REITs are required to distribute a minimum of 90 percent of their taxable income as dividends.4 Around 66 percent of REITs’ total returns come from dividend income. REITs have an average annual dividend yield of 4.14 percent, which is double that of the companies in the Standard & Poor’s 500.5
In addition to the perks of receiving dividend income, REIT investors have tended to benefit during periods of increasing inflation, since rental rates can rise along with other prices.
Benefits of owning REITs instead of real property can include: not having to commit as much capital in order to invest; the ability to invest in diversified types of real estate spanning geographical areas; and the ability to gain exposure to commercial real estate.
REITs also suit those who want to invest in real estate without purchasing a property of their own. Their reasons might include that they are relocating soon, don’t want to be a landlord, or aren’t financially comfortable taking on a lot of debt.
These trends have helped contribute to investors collectively driving up the market capitalization of REITs to $935 billion, according to the National Association of Real Estate Investment Trusts.6
If you are interested in gaining exposure to REITs, exploring the Motif catalog can be is a great place to start. The professionally-built motifs that contain REIT holdings are listed below.
Office Space: This motif contains commercial REITs in which the majority of the properties’ mortgages don’t have floating interest rates.
Renter Nation: This motif includes REITs focused on developing, leasing, or operating rental properties in the U.S. The largest segment covers rental units in western states.
However, some might consider the high valuations in this sector to be risky. No one knows whether real estate has peaked or will continue rising in value, so it doesn’t hurt to have a cautious approach.7
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Investing in REITs can offer unique risks that you should be aware of prior to making an investment decision. Investing in REITs can involve risks that are similar to those associated with direct ownership of real estate, such as changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and credit worthiness of the issuer. Investing in REITs may pose additional risks such as real estate industry risk, interest rate risk and liquidity risk. Past performance is no guarantee of future results.
Investing in securities involves risks that you should be aware of prior to making an investment decision. These risks include the possible loss of principal.
An investment in individual stocks, or a collection of stocks focused on a particular theme or idea, such as a motif, may be subject to increased risk of price fluctuation compared to more diversified, holdings due to adverse developments that can affect a particular industry or sector.
Motif makes no representation regarding the suitability of a particular investment or investment strategy. You are responsible for all investment decisions you make including understanding the risks involved with your investment strategy.
1 Tuttle, Brad, “U.S. Homeownership Drops To Its Lowest Level Since 1967,” Time, July, 28, 2015.
2 Kenney, Allen, “What is a REIT?” REIT.com, 2015.
4 Buller, Steven, Wald, Sam, and Rubin, Andy, “Are You Real Estate Diversified?” Fidelity Viewpoints, October 23, 2013.
5 National Association of REITs, “REIT Industry Fact Sheet,” REIT.com, July 31, 2015.
7 Yu, Hui-Yong, “Property Brokers Falter as Real Estate Boom Seen Cooling,” Bloomberg, August 24, 2015.