Introduction
Investing in Real Estate Investment Trusts (REITs) can be a lucrative strategy for generating income and diversifying your portfolio. However, deciding where to hold your REIT investments is equally important. In this article, we will explore the different types of accounts you can consider for your REITs and provide valuable insights to help you make an informed decision.
Criteria to use in selecting REITs to own (Step #1)
When choosing individual REITs to own, it's crucial to have a set of criteria that align with your investment goals. Jussi Askola, a respected contributor, has provided five simple criteria to seek alpha-rich returns from the REIT sector:
- Overweight Small-Cap REITs: Small-cap REITs often present attractive valuations compared to larger counterparts, with average valuations as low as 10x cash flow. Investing selectively in these small caps can yield better results.
- Focus on Superior Sectors: Instead of blindly investing in sectors like retail, office, and hotels, which may have uncertain long-term prospects, it is wiser to focus on sectors with more resilient fundamentals, such as net lease, storage, and specialty.
- Avoid Bad Apples: Recognize that some management teams prioritize their own interests over shareholder returns. It is essential to skip the REITs with poor track records and significant conflicts of interest.
- Buy Below NAV: Overpaying for REITs can lead to disappointing long-term results. Pay close attention to the Net Asset Value (NAV) and aim to buy at share prices that are below the estimated NAV.
- High Yield Now: Real estate is primarily an income-driven investment. By targeting REITs with an average dividend yield of approximately 8%, you can rely less on stock market appreciation and outperform in a flat market.
My current REITs' exposure and a few on my potential list (Step #2)
To illustrate the different types of REIT assets and their potential returns, let's consider a few examples:
National Health Investors (NHI)
Source: www.nhireit.com/portfolio-2/
Omega Healthcare Investors (OHI)
Source: Map of Our Locations
Global X SuperDividend REIT (SRET)
This ETF focuses on the Global SuperDividend REIT index, reflecting the performance of the 30 highest dividend-yielding REITs globally.
Cohen & Steers Total Return Realty (RFI)
This fund emphasizes high total return, with a focus on current income and capital appreciation.
Invesco Global Real Estate (ARGYX)
This fund seeks high total return by investing in securities of real estate and real estate-related companies.
REITs Fund via my work 401(k) plan
This represents the largest REIT holding, accounting for approximately 60% of the REIT exposure.
Source: Merrill Lynch Company Plan site
PennyMac Mortgage Investment Trust (PMT)
PMT is classified as a mortgage REIT (mREIT) and specializes in residential mortgages.
These examples showcase the diversity of REIT assets and the different sectors in which they operate. It's essential to evaluate each REIT based on your investment criteria and risk tolerance.
Picking which type of account to hold my REITs in (Step #3)
Choosing the right type of account to hold your REIT assets depends on your specific circumstances. Consider the following factors:
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Tax-Advantaged Accounts: High-yield REITs can provide a significant level of current income, making them well-suited for tax-advantaged accounts. These accounts offer tax benefits, even under the new tax law, which exempts 20% of REIT dividends from taxes.
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Taxable Accounts: Lower-yield REITs can be held in taxable accounts, as the tax benefits may not be as significant. This strategy allows you to balance your overall portfolio and potentially optimize your tax situation.
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Closed-End Funds (CEFs) and Mutual Funds (MFs): Consider the tax implications associated with CEFs and MFs, as they may generate capital gains as part of their returns. These gains could be more advantageous in taxable accounts, where the lower taxes incurred would not be lost in tax-advantaged accounts.
Carefully evaluate your investment objectives, income needs, and tax considerations when deciding which account is most suitable for your REIT holdings.
Going Forward Portfolio Strategy
As you look to expand your REIT holdings, seeking advice from reputable contributors and leveraging tools like PortfolioVisualizer can be instrumental in managing your portfolio effectively. Backtesting models and historical data can provide valuable insights into the performance and correlation of REITs with the broader market.
Conclusion
Investing in REITs offers a range of options, from investing in funds to selecting individual REITs. By following specific criteria when choosing REITs and considering the appropriate type of account for your holdings, you can optimize your investment strategy. Seek advice from knowledgeable contributors and stay informed about market trends to make well-informed decisions. Remember to click on the 'FOLLOW' button for more insightful articles that can help you navigate the world of REIT investing.
Author's note: This article is for informational purposes only and does not constitute financial advice. Always consult with a professional advisor before making any investment decisions.
