Does a REIT Provide the Same Sort of Diversification as Owning Real Estate?

By Markets

In this segment from our MarketFoolery podcast, Mark Reeth and Million Dollar Portfolio's Jason Moser dig into the REIT universe and the differences between owning a piece of a REIT and a piece of property. And there's one very specific piece of advice they have about what to research before you invest.

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A full transcript follows the video.

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This podcast was recorded on Sept. 14, 2016.

Mark Reeth:Let's go ahead and dive in. We'll start with @SmallCapDanny, who asks, "Can you guys talk about REITs, R-E-I-T-s? Can you buy a REIT stock like American Tower for same diversification purposes as plain, old real estate?" I have no idea how to answer that question because REITs to me are these big, scary amalgamations of real estate, which unto itself, is an interesting industry. What's your take on Danny's question?

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Jason Moser: It's a fascinating industry. Honestly, if you're going to choose between investing in actual real estate or a real estate investment trust, a real estate investment trust is a far more attractive way to go, because when you look at actual real estate, and I can say this having owned a few properties in my life, owning real estate is just very cumbersome. It's very inefficient from the transaction side, whether you're buying or selling. There's a lot of money wasted in the process, and historically speaking, I think housing, generally speaking, is doing well just to keep up with inflation. We had that outlier in the early 2000s when the housing hit, but that's not normal, so I think that real estate investment trusts are a great way to get some real estate exposure with very high dividend yields. They're not all created equal. It really does boil down to management, so you want to make sure you got a management team in there that's been around for a while and knows what they're doing.

Then I also think just to remember that in times of higher interest rates, it can be that things like REITs and MLPs, because of their high yield, often investors are chasing that for the high dividend yield, but when interest rates start to go up, and there are some lower-risk investments out there with attractive yields, you can see money flowing out of those REITs and MLPs and into other sorts of fixed-income instruments with less risk and better yield, so that can play out on the stock price for those REITs in the short run. I don't think that really should be the driver of whether you decide to invest in REITs or not. I think they're great holdings for very long periods of time, because you get could accumulate some serious dividends in the process, but yeah, you want to also make sure you research the team behind the company.

Reeth: Makes sense.

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