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There are 'pockets of opportunities' in REITs despite 2024 headwinds: Morgan Stanley's Ron Kamdem
Some Americans believe real estate is the best long-term investment. If you are among them, real estate investment trusts, or REITs, might be the easiest way to tap the market.
About 36% of surveyed Americans ranked real estate as the top long-term investment, more than cited stocks or mutual funds (22%), gold (18%) and savings accounts or certificates of deposits (13%), according to a recent survey by Gallup, a global analytics and advisory firm.
Fewer of the surveyed adults believe bonds and cryptocurrency are good investments for the long haul, at 4% and 3%, respectively, the report found.
The firm polled 1,001 U.S. adults through telephone interviews from April 1-22.
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For those people who see long-term investment potential in real estate, REITs can be a great way to start as they have a "low barrier to entry," said Stacy Francis, a certified financial planner and president and CEO of Francis Financial in New York City.
An REIT is a publicly traded company that invests in different types of income-producing residential or commercial real estate. In many cases, you can buy shares of publicly traded REITs like you would a stock, or shares of a REIT mutual fund or exchange-traded fund. REIT investors typically make money through dividend payments.
Some, "you can invest in for as little as $25," said Francis, a CNBC Financial Advisor Council member.
'No one gets super emotional about stocks'
Real estate is a popular investment option among some Americans because it can evoke emotion and feeling, unlike stocks and bonds, Francis said.
"No one gets super emotional about stocks," she said. "But individuals definitely get emotional about real estate."
Some people see it as a legacy to give to their children.
"Instead of giving them a portfolio of stocks, I want to give them a house that is physical and they can use," Francis said as an example.
But buying a property and becoming a landlord takes a significant investment of money and time, more so than other kinds of portfolio assets.
"It's not easy being a landlord," said CFP Kashif Ahmed, president of American Private Wealth in Bedford, Massachusetts. "There's far more to it than just getting a monthly check."
Once you buy a property and turn it into an investment, you have to manage the property, properly insure it and be able to service it.
Whether you do this yourself or have someone on your behalf take care of the property, it can cost money, Ahmed explained.
REITs can also offer opportunities for diversification. Depending on the company, you are exposed to hundreds or even thousands of different properties or regions, experts say.
You can also invest in different kinds of real estate properties, such as shopping malls, warehouses and office buildings. However, if you invest in a region or sector that experiences devaluations, that price decline will be reflected in your portfolio.
"If there's a REIT and it's investing in shopping malls across the country, and shopping malls are not doing well … you're going to feel that," Francis said. "You're not going to be protected."
How much real estate should be in your portfolio
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If you truly want to tap into the real estate market as a long-term investment, "really research on these funds," Francis explained.
REITs should also contribute to the diversification of your portfolio, "they shouldn't be all of it," said Francis. Some advisors recommend REITs should take up no more than 25% of your portfolio, she said.
Be wary about how the REIT will affect your tax situation. REITs often pay out 90% or more of the profits in the form of dividends, which can be subject to ordinary income taxes, experts say.
"It's as if those dividends came to you and your paycheck at work," Francis said.
If you don't need the additional income, try adding the REIT in a tax-sheltered account, such as an individual retirement account, Ahmed said.
"Asset location matters," he added.
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