Long-term investors looking for ways to diversify risks may want to consider some real estate exposure. The timing for investing in this investment category has again become favorable due to the expectation that the Federal Reserve will deliver more cuts to save the US economy from a recession amid the growing trade war between the US and China.
Owning real estate in your portfolio has many benefits. Because real estate has a low correlation with other financial investments, such as shares and bonds, you spread your risk by adding real estate to your existing portfolio. For example, in a low-interest environment, property values ​​improve and perform better than other assets.
Buying the best trusts for investment property (REIT & # 39; s) is a way to include real estate in your portfolio. You don't need millions of dollars to invest in REIT & # 39; s; you can start with as little as $ 5,000.
Investing in REIT's has many advantages. One of the biggest is that REIT & # 39; s are managed by professional managers who know how to manage real estate and achieve the best returns. The second advantage is that many tax laws favor REITs, which have to pay a large part of their taxable income as a dividend to shareholders.
REITs typically fund investments by raising capital on the equity and debt markets, including through short-term financing, and use leverage to increase their bets.
Did you miss the boat on REIT & # 39; s?
But is it a good time to invest in REITs or have investors on the sidelines already missed the boat? The Vanguard Real Estate ETF (NYSE :), a proxy for the REIT sector, has won around 23% this year, against a return of 15%.
Vanguard REIT price chart
In the past month, the ETF jumped by more than 3% when the 4% fell while the yield curve reversed, giving one of the clearest signals to investors that a recession that will force the Fed to lower interest rates becoming more threatening.
A recent report in the Wall Street Journal said that even if we see a global economic slowdown, REITs may be able to maintain their positive performance because the real estate sector has improved its corporate governance and is less dependent on leverage.
Citing John Creswell, the executive director of Duff & Phelps Investment Management Co., the report adds that REIT & # 39; s could be a better bet if a slowdown hits the economy, partly due to pent-up demand for single-family homes. , self-storage units, data center space and cell towers – sectors that have improved the performance of REIT & # 39; s this year.
If REIT & # 39; s are new to you and want to follow a low-risk approach for this sector, it is better to invest through Exchange Traded Funds (ETF & # 39; s). For example, Vanguard has a low cost ratio of 0.26%, with a dividend yield of 4.7%.
An alternative to the Vanguard ETF would be the iShares Core U.S. REIT ETF (NYSE :), which also offers good exposure to US-focused real estate companies. This ETF currently offers a dividend yield of 4.47% with a return of 21.46% year-to-date.
Bottom Line
In this happy environment for REITs, however, it must be borne in mind that investing in REITs is in fact a gamble on interest rate direction. Current moderate sentiment about the future Fed interest rate policy could quickly reverse if the US economy remained resilient, or the country entered into a deal with China over its trade dispute. That said, long-term investors will not lose if they opt for quality REITs that offer a regular flow of income.
