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REITs vs. Stocks: Leveraging the Benefits of Real Estate Investment Trusts

August 16, 2019

REITs vs Stocks - Leveraging The Benefits of Real Estate Investment Trusts
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Every investment strategy comes with its own distinctive litany of pros and cons. External factors also come into play when deciding where to invest your money. Current market temperature, portfolio diversity, and even personal financial goals can all influence your investment approach.

Stocks, properties, bonds โ€” no matter what means of investment you choose, there are always potential risks and rewards to consider before making a final decision. However, some investment vehicles consistently outpace other options, helping investors mitigate risk while optimizing overall return on investment. One consistently reliable option for financiers? Real estate investment trusts.

REITs: What They Are and How They Differ From Traditional Stocks

Recent real estate and stock market trends have showcased the many significant benefits offered by owning shares in real estate investment trusts (REITs). Understanding what REITs are and how they differ from stocks can help you determine if it’s the right option for your existing portfolio.

A REIT is a company that owns, operates, or finances large-scale, income-producing real estate properties, such as:

  • Office buildings
  • Shopping malls
  • Apartments
  • Hotels
  • Self-storage units.

While REITs and stocks are both types of investments that can be purchased on stock exchanges or through a broker, they work differently within the investment market. REIT investors buy shares in a trust that owns and manages real estate properties or mortgages. However, stock investors acquire shares in the ownership of a public company.

Current Real Estate Trends Make REITs a Sound Investment

According to Forbes Magazine, residential and commercial real estate have yielded annual returns greater than 7% for investors over the past five years, indicating that now is the perfect time to invest in income-producing rental properties, such as REITs. While today’s current real estate trends alone make a strong case for REIT investment, a recent Marketwatch report reveals that REITs have actually outperformed stocks for more than 50 years.

In fact, when considering worldwide financial assets, real-estate investments, on average, have surpassed stocks by over a full percentage point every year since 1960. The study demonstrated that from 1960 to 2015, real estate proved a stronger investment than stocks during recessions and economic expansions, and during times of rising and falling inflation. The publication also showed that even REIT market’s lowest-performing year was still better than the stock market’s lowest-performing year.

REITs: A Proven, Consistent Investment Strategy

Additionally, REITs’ best year outperformed the stock market’s best year, and collectively, the REIT market had fewer years that recorded a loss of more than 10% than stocks did. Put simply; real estate has proven a far more consistent investment than stocks overall, over the past 50 years. While their performance has, of course, varied over time, they have a long history of producing good returns.

Understanding The Differences Between REITs and Stocks

While REIT and stock shareholders both receive income from their investments through dividends, some stocks do not pay out gains. However, REITs have stringent guidelines regarding money paid by a company to its owners that states at a minimum of 90 percent of a REIT’s total taxable income must be dispersed through dividends, and be taxed only once at the shareholder level.

REITs also don’t pay corporate income tax, and they’ve outperformed corporate bonds in recent years. And unlike bonds, REITs have the potential for longer-term capital appreciation, making them a solid investment strategy for IRAs and 401(k) retirement accounts. Traditional stocks, on the other hand, pose higher risks to retirement plans, as they’re more likely to be affected by market performance and instability. Additionally, while both forms of investment can provide a steady stream of income for investors, REITs earn money based on contracted rent or lease payments and often prove a more reliable source of income while held. Stocks require strategic buying and selling based on market climate.

REITs Offer Enhanced Diversification and Liquidity Compared to Stocks

Yes, REITs, much like traditional stocks, can be volatile. However, real estate investment trusts can have a lower-than-average correlation with other areas of the market, meaning that while they can be affected by large trends, they often deviate.

REITs also offer greater diversification and liquidity than a traditional real estate investment, such as purchasing a rental property, as they allow you to own a share of many properties. Also, while real estate prices generally rise with inflation, REITs often remain unaffected. By adding REITs to your investment profile, you can increase the likelihood of reduced volatility, broader diversification, and a more consistent source of income.

Contact Southpace Properties today to learn more about the recent and long-term trends of REITs investments.


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