April 14, 2024

Business Bib

Business & Finance Blog


3 min read

Real estate investment trusts are a crucial consideration when creating any equity or fixed-income portfolio. They offer greater diversification, potentially higher total returns, and/or lower overall risk. They have the ability to provide dividend income along with capital appreciation.

Retail REITs

Nearly 24 percent of REIT investments are found in shopping malls and freestanding retail. This represents the one biggest investment type in the United States. Most shopping center we go are probably owned by a specific REIT. When thinking of investing in retail real estate, you have first to examine the condition of the retail industry.

It’s important to remember that retail REITs get their cheese from the rent that their tenants pay. If retailers experience cash flow problems because of poor sales, it’s possible that they could delay or even default on those monthly payments, eventually being pushed into bankruptcy. At that instance, one needs to find a new tenant, which isn’t really easy.

Like any kind of investments, they should have good profits, strong balance sheets, and as little debt as possible, especially the short-term kinds.  During a turbulent economy, retail REITs with huge cash positions will be presented with opportunities to buy good real estate at distressed price.

Residential REITs

Residential REITs are those that own and operate multi-family rental apartment buildings as well as manufactured housing. When trying to invest in this type of REIT, one should consider several factors before jumping in.

For example, the greatest apartment markets are usually found where home affordability is low relative to the rest of the country.

Within each specific market, investors should seek population and job growth. In general, when there is a net inflow of people in a city, it’s because jobs are readily available and the economy is showing signs of growth.

 A falling vacancy rate combined with rising rents is a sign that the demand is improving. Provided that the apartment supply in a particular market remains low and demand continues to rise, residential REITs should continue to do well.

Healthcare REITs

Healthcare REITs are those that invest in the real estate of hospitals, medical centers, nursing facilities, and retirement homes. The success of this real estate is directly tied to the healthcare system. A big portion of the operators of these facilities depend on occupancy fees, Medicare and Medicaid reimbursements as well as private pay.

When it comes to healthcare REITs, you should look for things like a diversified group of customers as well as investments in a number of different property types. Specialization is good in some ways but you should also spread your risk. In general, as increase in the demand for the healthcare services, which should happen in an aging population, is good for healthcare real estate.

Mortgage REITs

Around 10 percent of REIT investments are in mortgages as opposed to the real estate itself. But this type of REIT investments also comes with risks, even though they invest in mortgages instead of equities.

For instance, an increase in interest rates would mean a decrease in mortgage REIT book values, pushing stock prices lower. Additionally, mortgage REITs get a considerable amount of their capital through secured and unsecured debt offerings. Should interest rates increase, future financing will be more expensive.