REITs Broken Down
Whether markets are up or down, real estate is a perennially popular option for investors who want to diversify their holdings. Real estate provides safe harbor during periods of market volatility, as well as the potential for passive income during any economic scenario. And for their part, real estate investment trusts—or REITS—are a popular way for investors to incorporate real estate into their portfolio without having to handle the process of finding and buying property themselves.
REITs can be a complicated investment option for newcomers, however. Investing in a REIT bears similarities to a mutual fund, alternative investment, and real estate all rolled into one. Plus, every REIT is a bit different, making it crucial to do one’s homework before diving in headfirst. Here are the basics on REITs, their pros and cons, and REIT alternatives, such as farmland, that might be more at home within your portfolio.
What is a REIT?
REITs have been around since the 1960s when the U.S. government allowed people to invest in income-producing real estate as they could with other asset classes like stocks and bonds. REITS are companies that invest in income-generating real estate—be it commercial or otherwise. Investors can then buy shares of a REIT and, by virtue of the REIT owning real estate, own shares in those properties as well. REIT categories are based on what kind of investments they include. This typically includes mortgage REITs, exchange-traded REITs (which can be bought or sold on a stock exchange), non-listed REITs (not available for public trading), or even by sector (commercial, medical, or personal real estate, for example).
Essentially, REITs provide investors with a way to obtain fractional ownership of real estate as opposed to purchasing a specific property on their own. This makes it easier to incorporate real estate holdings without much of the legwork, research, and costs associated with direct property ownership. You can also compare REIT performance as you would with other kinds of investments before committing.
What Makes REITs Attractive?
There are plenty of positive attributes with REITs—especially if portfolio diversification is one of your top priorities. The sheer variety of RETs available gives investors a range of options across nearly every kind of real estate sector. This means you can pick and choose from different REIT categories to build the kind of asset allocation that works best for your portfolio. Or, alternatively, you can broaden your existing portfolio into new real estate markets without taking on an inordinate amount of risk.
Another key benefit of REITs is simplicity. Doing your own research into real estate investment opportunities can be time-consuming. So too can be finding the funding to make a purchase, or undertaking the process of forming an agreement with other like-minded investors to go in on a purchase together. Then there’s the work of managing the property and fulfilling the duties of a landlord—both of which aren’t necessarily conducive to people who can’t devote themselves to these tasks full-time. REITs take care of all of these challenges without individual investors having to shoulder any of the work.
REITs can also be easy to invest in or even trade. Buying shares of a publicly traded REIT is as easy as placing an order through your financial advisor or your preferred trading platform of choice. You can opt for a REIT that isn’t publicly traded as well, of course, and they are typically easy to find for investors too.
What Makes REITs Unattractive?
REITs offer investors an easy way to break into real estate investing, but not without potential pitfalls or risks. The first and most obvious downside to REITs—as with any kind of investment—is risk. Real estate investments are not all created equal: some succeed where others fail. This can be due to several factors, such as mismanagement or a turbulent real estate market. For example, if you invested in a commercial REIT that ended up losing tenants at its properties, you may not see a return on your investment.
REITs also come with significantly higher tax implications than many other investment classes. These trusts have to pay property taxes on the buildings and real estate they own. Depending on where the REIT operates, this can total 25 percent of its total operating expenses. These expenses come out of the returns you’d get as a shareholder. Plus, since REIT income is considered “ordinary income” rather than investment dividends, you’ll pay more in tax on your own earnings from the REIT as well.
The Top REIT Alternative to Consider
The good news is that there are other investment types out there that blend some of the best benefits of a REIT with alternative tax, fee, and risk implications—often providing an advantage over RETs in the process. Investors who are curious about incorporating real estate into their portfolio should look toward farmland investing as a solid REIT alternative. Farmland is a historically steady investment, which is rarely suspect to the same ups and downs as commercial and personal real estate.
FarmTogether is the preeminent provider of farmland investing opportunities. Our platform, which is not a REIT itself, offers you what REITs cannot: namely, you’re able to pick the farmland you want to invest in—be it based on location or the type of crops being farmed. REITs, on the other hand, do not provide you with the opportunity to control where your money gets invested. That’s up to the owners of the REIT, which means you end up giving up a sizable amount of control in where your money goes.
Plus, with FarmTogether, you become an actual owner of units within an entity that’s devoted to ownership and operation of farmland—something REITs do not. This offers a distinct advantage over REIT structures, which puts you at the mercy of their management decisions, strategies, and the properties they purchase. Plus, with publicly traded REITs, you’ll still have exposure to the ebbs and flows of the stock market, which is one thing many alternative investors seek to avoid.
Advantages of Farmland Investing
There are several other financial advantages that come with farmland investing through FarmTogether. First and foremost is the low volatility of farmland valuation. Farmland has, on average, enjoyed historically low volatility compared to other asset classes. This even includes major options, such as the 10-year U.S. Treasury Bond, which is known for its stability. Farmland has also provided investors with more stability than the S&P 500, gold, and the Dow Jones REIT Index. This is because farmland returns tend to move in the opposite direction of the overall stock market: when the S&P 500 loses value, farmland tends to gain value. This makes it an alluring investment during a bear market or when inflation is on the rise.
If these advantages weren’t enough to make farmland investing a great alternative to REITs, there’s also the inflationary hedge farmland offers by way of producing commodities. As inflation rises, so too do prices for corn and grain. As an owner of farmland, your investment capitalizes on these price increases, helping to offset some of the other effects inflation has on the economy and investing environment.
When you invest in farmland through a company like FarmTogether, you’ll benefit from having all of the due diligence checks and research done for you as you would with a REIT. Our team of experts looks for investment opportunities across the country. They select the top options and provide these choices to members with a full breakdown of investment period, expected returns, and more. Starting with FarmTogether only requires $10,000, and you can work directly with our team to get your portfolio up and running.
The Right Fit For Your Portfolio
If you’re looking to incorporate real estate into your portfolio, REITs can provide an attractive way to do so without having to go through the legwork of finding your own real estate opportunities, buying a property, and then being responsible for its management and upkeep. REITs take out the messy work of managing real estate holdings while still providing investors with upside.
That said, REITs might not be the right fit for everyone. Not all kinds of real estate investments are created equal, either. Depending on your investment goals and strategy, another kind of real estate investing—such as farmland investing—might be a better fit. FarmTogether makes farmland investing easier than ever, combining the simplicity of REIT investing with the steady returns of farmland investing.
Learn more or sign up for a FarmTogether account today.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.