I recently visited Machu Picchu, and a fellow hiker asked me what I do for work. I explained that I run a real estate investment club and that we pool small amounts of money to collectively buy fractional shares in large apartment complexes. She furrowed her brow and replied, “But why would I need to bother with all that private equity stuff? I’m already diversified into real estate with REITs in my brokerage account.”
I cringed at her use of the word “diversified.” Because for all the benefits of real estate investment trusts—and there are many—they don’t do the one thing that most investors think they do.
They don’t provide much diversification from your stock portfolio.
But I’m getting ahead of myself.
The Case for REITs
Don’t get me wrong, I’m no anti-REIT crusader. They offer plenty of advantages for investors, starting with being completely passive. You click a button in your brokerage account and congratulations! You’re done and can go back to your demanding full-time job, family life, and hobbies.
They don’t cost you an arm and a leg, either. The minimum investment is simply the price of a single share, which could be as little as $10. Compare that to the minimum investment in a rental property or real estate syndication. Either will set you back tens of thousands between the down payment, closing costs, cash reserves, and initial repairs. For first-time investors, it often takes years to save that much investment capital.
Then comes the liquidity. You can sell shares at a moment’s notice with no transaction cost whatsoever.
Investing in REITs doesn’t require the same knowledge and skill as rental properties. I lost my shirt when I first started investing in rental properties because I didn’t know what I was doing. For REITs, it’s as easy as investing in a REIT index fund and calling it a day.
Real estate investment trusts have actually performed pretty well over the last…