Balboa Real Estate Report: Looking for an easier way to invest in Real Estate? Try REITs.
As a realtor, I get tons of questions from people wanting to invest in real estate or flip properties that have stopped themselves because they either didn’t have the funds or they didn’t know how to go about it.
For most people looking for an “easier” way to invest in real estate or properties without the hassle of being a landlord, I’ll usually suggest they look into real estate investment trusts (REITs). These are companies that basically own or finance income-producing real estate across a range of property sectors.
I like REITs a lot because it takes away much of the hassle and liability of being a landlord and keeping up the condition of the property.
I also like them because by law, they must pay out 90% or more of their taxable profits to shareholders in the form of dividends.
Per the Securities and Exchange Commission (SEC) on the 90% rule for REITs:
“To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90% of its taxable income to shareholders annually in the form of dividends.”
REIT investors who receive these dividends are taxed as if they are ordinary income. Plus, whether REITs are public or private, they must pay out the standard 90% of their income.
REITs generally fall into three categories: equity REITs, mortgage REITs, and hybrid REITs. Most REITs are equity REITs. I won’t get too much into that here, but it is pretty self-explanatory. But if you want to learn more, I have a great link to the SEC at the bottom of this post where you can read more on that.
As an investor, you have the option of looking into public REITs or private REITs. For me, I tend to look for publicly traded REITs since I can buy and sell with ease compared to private REITs, which may not be as transparent and may be more difficult to cash out of.
Naturally, most will tend to look at REITs with a strong dividend that is typically paid quarterly by a company to its shareholders out of its profits (or reserves). Other factors to consider besides a strong dividend yield will include the stock price of the REIT and its debt ratio.
For myself, I’ll also look at economic factors and industry trends as well when considering certain REITs. In recent years, that has included the pandemic, job growth, inflation, the global economic slowdown, and industry-specific outlooks.
For cost and investment purposes, low-cost REITs that run under $50 with significant growth potential is also something that is attractive, at least for me anyways.
This year has not been too good for REITs, most of which have been down on the year. Looking at 2023, however, some reputable publications and analysts are more optimistic about the performance of sector-specific REITs.
Below is some of my reasoning from a macroeconomic perspective as to why I will be choosing some more specific REITs
#1 Stay away from retail:
Retail sectors have taken a big hit this year. Retailers like Walmart and Target have publicly talked about having excess inventory because of weak consumer demand. This was basically due to rising inflation and high-interest rates, as consumers have had to be more conscious about what they spend their money on. Inflation may be cooling, but it will not disappear overnight. I am also hearing talk of a potential “credit bubble,” which would not be good. So, I would not invest in anything retail-related when it comes to real estate. So, companies like that own bunch of malls and retail outlets are a no go for me.
#2 Look at industrial:
More on the point of excess inventory. It’s not just retailers that have had an issue with a massive amount of product. Other industries have been dealing with oversupply. For instance, the petrochemical and resin/plastics industry has been plagued by excess supply this year. This has led to many industrial warehouses having to raise storage costs this year. That is expected to continue into 2023. Because of this, I like buying more on the industrial side of REITs.
#3 Look at medical/healthcare:
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The pandemic has been a boom for the medical industry. Whether it is hospitals, assisted living spaces, or medical lab/manufacturing spaces, the medical/healthcare industry has been vital these past few years. As we are further removed from the start of the pandemic, we may see a slowdown in this sector but it will continue to be vital. More hospitals and doctors’ offices have opened up this year and the US has been back at full capacity for some time.
#4 Look at rental/property management:
Here is the thing. You will always have people looking for a place to rent. Population growth is pretty much a given. In the past 3-5 years the US has seen massive migration in people moving to states such as Texas and Florida. It’s common for us here in Texas where I’m at to joke about how everyone has been moving here from California. But not everyone will buy a house right away when they move, and some will need to rent first or they may even prefer to rent. Either way, I prefer investing in property management groups that have operations in destination states like Texas.
Part of the migration away from California and New York is also because of the job market in some states. It has been well over 2 years since the US first started lockdowns (March 2020) due to Covid-19 and more companies have been sending people back to the office or have been implementing a certain number of days working in the office. Despite the “great resignation,” which has seen employees voluntarily resign from their jobs in massive waves in the wake of Covid, I strongly believe the end of stimulus packages, rising inflation and high-interest rates will force people back to the job market in 2023, even if we are seeing layoffs in some industries. That means there will be more demand for office space and office buildings around the world that have been either half-empty or completely vacant. For a better idea on this take a look in the links below at the weekly barometer from Kastle Systems, which tracks employee timecards for companies. Specifically, Take a look at their chart of office occupancy over the past two years. This is why I like some commercial office real estate REITs for 2023.
With all that said. If you’re interested in learning more about certain REITs and want to know what REITs I’m looking at for 2023 and why I like them, just contact me here. I’d love to discuss them with you.
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