REIT investing is a great way to diversify your portfolio. Compared to traditional stock markets, real estate is not directly tied to the economy, making it a better choice during a downturn. For example, during the dot-com recession, REITs had a positive total return while stocks were down. Moreover, REITs have historically performed well compared to other major indices, including the S&P 500, the Russell 1000, the Russell 2000, and Bloomberg Barclays U.S. Aggregate bond index.
One of the main advantages of investing in REITs is that it has many tax benefits. While most stocks are subject to corporate taxes, dividends from REITs are taxed at the investor level. Therefore, a large portion of the dividend is kept by the investor. Further, dividends from REITs can compound, meaning that you can earn more money while taking advantage of the lower tax rate.
The cost of capital is another factor that affects REITs’ long-term investment potential. Since REITs need to raise money to maintain their operations, the cost of capital is an important factor in determining their profitability. Typically, REITs raise money from a variety of sources, including equity and debt. Undistributed cash flow (DCF) is the cheapest source of capital, followed by debt and equity. Total interest expense is the cost of debt capital for a REIT.
Another advantage of REIT investing is its accessibility. While a single REIT can represent a large proportion of a portfolio, it is still advisable to have other investments such as bonds, which serve as a hedge against bear and recessionary periods. This makes REIT investments a good option for those who have a long-term investment horizon, and if you don’t mind taking on more ongoing costs, such as property management. The downside of equity investing, however, is that it comes with greater risks.