By Liz Brumer-Smith, The Motley Fool
Real estate investment trusts, or REITs (pronounced REETs), have become an increasingly popular avenue for investing in the stock market -- and understandably so. These companies, which use a special tax structure to invest in real estate and real estate-related securities, can offer diversification, access to high-quality real estate, a hedge against inflation, and reliable dividend payments.
If you're new to the world of REITs and looking for a bright new investment avenue for 2022, here are 10 reasons why you should invest in REITs this year.
1. REITs are a top performer historically
The National Association of Real Estate Investment Trusts (NAREIT), which tracks publicly traded REITs, found that since 1990, REITs have outperformed the stock market 56% of the time.
The longer the index was tracked for comparison, the greater the difference in the REITs' performance compared to the S&P 500. For example, from 1972 to the past 20 years, REITs have outperformed the S&P 500 consistently.
2. REITs make real estate easily accessible
REITs are one of the easiest ways to diversify your portfolio without ever having to leave the stock market. Shares of publicly traded REITs can be purchased from a brokerage account for just $10 to $200 or more (depending on the company), making it an extremely accessible investment class for the everyday investor.
Investors aren't required to own or manage any of the investments personally but can still gain access to many of the benefits of owning that real estate asset class. While there are numerous private REITs, most investors choose to invest in public REITs because of the ease of trading.
3. REITs pave the way to portfolio diversification
Since REITs invest in a wide variety of real estate assets, you can diversify your portfolio in real estate in a number of ways.
Equity REITs invest in physical assets, leasing the space to long-term tenants, and can include industrial real estate, self-storage, apartments, single-family rental homes, office buildings, retail, hospitals, senior housing, hotels and other entertainment venues among others.
Mortgage REITs, or mREITs for short, invest in real estate debt such as mortgages or other real estate securities.
4. The quality of real estate can't compare
REITs were created in 1960 to make institutional-quality investments more accessible to everyday investors, and they've done a tremendous job of doing just that.
REITs often own some of the highest-quality assets among their competitors in the space -- something that simply isn't possible for most investors, given the barriers for entry that are often associated with these types of investments.
5. They are reliable dividend payers
REITs are required to pay, at minimum, 90% of their taxable income to shareholders in the form of dividends. Doing this helps give the REIT several tax advantages that outweigh the drawbacks of high payout thresholds. It also means investors in REITs can rely on dependable dividend payments.
6. REITs are growth stocks, too
When it comes to the benefits of investing in REITs, dividends get most of the attention. However, REITs can have loads of growth potential too. Nowadays, there are dozens of high-growth sectors within real estate that provide investors with long-term growth opportunities.
Innovative Industrial Properties (NYSE: IIPR) for example, has seen its share price grow 909% over the past five years, helping investors achieve a 1,110% return on investment during that time.
7. REITs reduce some risk
All investments carry risk, including REITs. But equity REITs, in particular, reduce some risk exposure because they invest in physical real estate, which is backed by tangible assets.
Unlike a tech stock, which is reliant on a certain number of users or the idea behind a platform, app, or program, REITs earn money from rental income and always have an underlying asset that carries notable value to rely on.
This gives investors an extra layer of security when it comes to investing. However, it's important to note that values, like anything, can change for the positive or negative, depending on supply and demand.
8. REITs can perform well, even in a down market
Publicly traded REITs aren't immune to market impacts or volatility. When the market is down, even the highest-quality REIT can get hit. But because REITs invest in real estate, values and returns are independently impacted by what is happening in the real estate market. This means REITs can perform well even in a bear market.
9. REITs offer liquidity
One drawback to investing in real estate is that it's not a very liquid asset class. If you own a fourplex and need cash now, the only way to tap into the property's equity or value is to sell it or draw on a line of credit, which can take from several weeks to potentially months to close.
REITs can be traded quickly through a brokerage account, meaning you can gain liquidity in your investment in a matter of minutes.
10. REITs deliver operational transparency
Publicly traded REITs are required to have standards for reporting their earnings, operations, and social, environmental, and management governances (ESG) policies.
These standards help investors stay informed on how the company is performing as it relates to the market, which changes constantly. It means investors can see warning signs or signals for growth opportunities on the horizon and adjust their investments accordingly.
The best time to invest in REITs is now
REITs can be a worthwhile investment that not only offers growth opportunities but also reliable and consistent dividend payments. And given the ease and access investors have to this investment class, investing in REITs is a no-brainer.
Read more: 10 Signs of A Strong Real Estate Market
I started investing in REITs in 2018 but wish I had jumped on the bandwagon sooner. Time is a wonderful thing in the world of investing, but for time to be on your side, you have to start investing now.
Liz Brumer-Smith owns Innovative Industrial Properties. The Motley Fool owns and recommends Innovative Industrial Properties. The Motley Fool has a disclosure policy.
