In his book, "The Ascent of Money," financial historian Niall Ferguson notes that the real estate market is unusual in the Anglo-American world because it is one of the few markets that almost everyone feels qualified to talk about. When it comes to stocks, it’s fairly common to hear lay people say, “Oh, I don’t know anything about that, I don’t understand how it works” - to say nothing of asset classes such as bonds and commodities.
By contrast, the idea that real estate is a good investment is almost universally held. A friend of mine works for a real estate consultancy and likes to say (in a somewhat tongue-in-cheek way) that there is never a bad time to buy property: either the market is doing well and investors should get on board with the trend, or the market is going through some trouble, which means it is a good time for a contrarian play. Now whether or not this is entirely true is up for debate, but it does highlight the common knowledge that property is a desirable investment.
The challenge
Unfortunately for most investors, buying a second (or even a first) property is not something they can easily manage. Furthermore, even if you are able to purchase a property that you then rent out or sell several years down the road, you are in danger of putting all of your eggs in one basket. Unless you are quite wealthy, your real estate portfolio is likely to be extremely concentrated and subject to idiosyncratic risk.
This is why real estate investment trusts can be so useful, particularly to small investors. REITs are publicly traded companies that own and operate properties, and which are legally obligated to return 90% of their income to shareholders via dividends. Because they trade on a stock exchange just like any other company, investors can buy shares and receive exposure to a large number of properties, at a tiny proportion of the price of the overall portfolio.
Furthermore, the large size and number of employees that most REITs have means that they can invest in commercial real estate far more efficiently than even wealthy individual investors. It is much easier to purchase a new office building and to rent that space out to numerous different tenants when you have a legal and accounting department handling the day-to-day management of those relationships than it is when you are working alone. REITs also have the ability to specialixe in particular industries. For instance, there are REITs that focus exclusively on the health care sector, or assisted living, whereas others may be generalists and have extremely diverse portfolios.
As an investor, you can even buy multiple REITs and have exposure to potentially hundreds of different properties, diversifying your holdings and providing an ample margin of safety. You should consider adding them to your portfolio if you are seeking access to the real estate sector.
Read more here:
- Guggenheim’s CIO Doesn’t Think High Prices Are Here to Stay
- How to Invest According to Howard Marks
- When the Cure Is Worse Than the Disease
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