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How can REITs help in diversifying your portfolio in 2020?

Updated on 24 Feb 2020

REIT stands for real estate investment trust and it refers to a company that owns and operates real estate in order to generate income. How does this play into your portfolio creation for the next decade – our experts are here to tell you just that!

Introduction
What are the different types of REITs that can help with diversifying your portfolio in 2020?
What are the advantages of investing in REITs?
Finding the right REIT

Introduction

REIT stands for real estate investment trust and it refers to a company that owns and operates real estate in order to generate income. Different REITs specialize in different types of sectors, allowing a massive opportunity for diversification for consumers.

Various property types such as apartment complexes, commercial complexes, health care facilities, data centers, infrastructure (like cables, energy pipelines and cellular towers), self-storage, warehouses, office buildings, timberland, and others all can fall under REITs. Investing in REITs allows investors to generate a steady form of income because the dividends are shared.

This is an extremely important thing to keep in mind because fixed income investments often tend to take a bit of a backseat in the face of stocks, bonds, and other forms of investments that offer a superior return.

However, for investors with a low risk appetite, and investors looking to diversify their portfolio by adding a few stable entities into the mix, REITs can certainly prove to be a huge boom. It allows you to not only preserve capital, but also gain a stream of guaranteed income, which can then be used to facilitate more investments down the line, if need be.

Investing in a variety of asset classes can help you reduce the risk you’re exposed to, keep your income high, and even stay ahead of inflation. In order to ensure value investing, there should certainly be a few investments in your portfolio that guarantee a fixed income. Additionally, REITs also offer the benefit of high liquidity, letting investors feel secure in the knowledge that if the going gets tough, they can get out with their assets. They also trade like stocks and offer the plus point of being an asset class that is distinct from equities and bonds.

What are the different types of REITs that can help with diversifying your portfolio in 2020?

In order to understand how REITs help diversify your portfolio, it’s important to note that there are different types of REITs that can help you divide your funds between equity and debt markets, while still guaranteeing a fixed income. Some of the most commonly sought after types of REITs available for investors include the following:

  • Equity REITs: these REITS are the ones that own commercial property directly. They can include any of the following: office buildings, storage units, medical centers and even shopping malls.
  • Mortgage REITs: these REITs do not directly own any property, which is why they fall under the debt category. They are ideal for investors that want to reduce their risk by a huge margin.

What are the advantages of investing in REITs?

When a person buys a share of REIT, this means that they now own a physical asset that has a life span that’s expected to be long. This means that there is always the potential to collect rent while also benefiting through property appreciation. An investment such as this creates a safety net for the investors as they always have the security of the underlying properly.

Another advantage that comes with investing in REITs is that people can invest in real estate without having to worry about the high capital that is generally associated with the same. For instance, if you’re to invest in a residential properly, you have to pay a sum that greatly exceeds what your investment in a particular REIT may be. In order to mimic the kinds of returns you would get from REITs, you would have to invest in lots of different types of properties, which may not be possible if you are young and just starting out your investment journey.

As the funds a REIT receives are generally pooled together, investors can enjoy high levels of diversification as this allows them to buy different types of properties. This reduces problems that are typically associated with owning a single asset.

Finally, another huge advantage of investing in REITs is that by law, these investments are required to distribute at least 90% of their taxable income to the investors. This means that you can enjoy decent returns and have a fixed income, while also growing your wealth through other avenues.

Finding the right REIT

Finding the right REIT for your needs is not that simple. You must evaluate a myriad of factors such as the management and their track record, whether that REIT is properly diversified, and the funds it earns from operations (along with the cash that’s available for distribution). For a novice investor, evaluating all these factors can be a little challenging because there are too many variables as well as data points that rely on thorough research, which is something that no everyone has the time to do.

To make astute financial decisions, you must get in touch with our expert advisors!

Disclaimer

The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.

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This is offered only to Accredited and Institutional Investors as defined under the Securities and Futures Act, Chapter 289 of Singapore (“Act”), which broadly comprises of regulated financial Institutions, large corporates, high net worth individuals and sophisticated investors.

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