Author Topic: To REIT or not?  (Read 1503 times)

jpdx

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To REIT or not?
« on: July 28, 2018, 01:30:41 PM »
I have an additional chunk of cash that I am ready to invest. Should I go with a REIT fund or just more stocks?

I currently don't hold any REITs, just vanilla stock index funds and bond index funds. I'd like to add some real estate to the mix but worried about doing so in a time of rising interest rates.

I have the flexibility to make this purchase within a Roth or taxable account.

Thoughts?

Hargrove

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Re: To REIT or not?
« Reply #1 on: July 28, 2018, 01:47:36 PM »
REIT arguments are usually pro-diversification, but you don't need to diversify farther than index funds.

I should mention that the last stock pick I have in my not-play-money portfolio is O Realty, generally considered blue-chip and nowhere near its silly high, and still expensive and with a miserable performance the last two years. It's in a Roth, which I keep as a counterweight to a down payment I also have saved in stocks (I don't know when I'm going to use it yet). In general, though, I don't really recommend REITs as necessary. I liked the idea a long time back of having something in real estate without being a landlord... looked at Iron Mountain, Apple Hopsitality, STAG... and over time I realized I was just paying extra commissions to play a game I shouldn't bother playing.

I can say, however, you definitely do NOT want to do it outside of a Roth, if that and taxable are your only options. Dividends from REITs are regular income, taxed at your regular tax bracket, not qualified dividends. Unless it's a Roth, where none of your gains get taxed.
« Last Edit: July 28, 2018, 01:54:07 PM by Hargrove »

Classical_Liberal

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Re: To REIT or not?
« Reply #2 on: July 30, 2018, 10:14:35 AM »
Remember individual REIT's are pretty well diversified in themselves, since they hold various physical real estate.  As a result, this is one arena I prefer individual stocks vs funds.  Another argument against REIT funds is the high level of retail REIT concentration in those funds.  Retail in the form of malls is dying and the REIT funds with large holdings in companies like Simon (SPG) are under performing their potential, IMO.

Consider the high dividends of REIT's when choosing what bucket to hold them in, also consider what increasing rates may do to their profit margins.   

MustacheAndaHalf

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Re: To REIT or not?
« Reply #3 on: July 30, 2018, 10:45:22 AM »
What percent of your portfolio is waiting, in cash, to be invested?

REIT tends to be less correlated with other US stocks.  If you visit Portfolio Visualizer, it uses the time period 04/06/2009 - 07/27/2018 in it's display of asset class correlations:
https://www.portfoliovisualizer.com/asset-class-correlations

That chart shows VTI and VNQ are 0.74 correlated over that time frame, compared to international where VTI and VEU are 0.90 correlated.  You could also read "Unconventional Success" by David Swenson, who made REITs famous when he revealed they were part of the Yale Endowment's outperformance.

Are you planning to put REITs in your IRA or 401(k)?  If you put them in taxable, you pay ordinary income tax on their dividends - just like taxable bonds.

thd7t

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Re: To REIT or not?
« Reply #4 on: July 30, 2018, 10:49:19 AM »
I think you're hearing solid advice here, but to reiterate:
1. REITs aren't great for growth.  They almost always have to pay out dividends.  This is fine, but
2. The dividends are not qualified dividends, so they are not tax priveleged.
3. In one of his early posts, MMM promotes REITs, but they pretty much drop off his radar.  Real Estate doesn't.

I bought a couple shares of SNH when I started reading MMM five years ago.  It's not problematic, but it's nothing stellar.  I would consider alternatives.

HeadedWest2029

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Re: To REIT or not?
« Reply #5 on: July 30, 2018, 11:16:49 AM »
Also, important to note that publicly traded REITs are ALREADY included in the index fund (I believe they fall under the "financials" category.  It varies over time based on market cap of the REITs to the rest of the market, but it's not like your missing REITs by doing a total stock market index fund. 

RWD

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Re: To REIT or not?
« Reply #6 on: July 30, 2018, 11:39:49 AM »
I follow Rick Ferri's Core Four, which recommends a small slice of REITs, for reasons explained here. Mostly boils down to being separate asset class for diversification and commercial real estate being underrepresented in the stock market index. I also only hold them in my Roth IRA.

For the other point of view, JL Collins moved away from REITs for simplicity and because stocks are good enough.

jpdx

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Re: To REIT or not?
« Reply #7 on: July 30, 2018, 01:14:45 PM »
Remember individual REIT's are pretty well diversified in themselves, since they hold various physical real estate.  As a result, this is one arena I prefer individual stocks vs funds.  Another argument against REIT funds is the high level of retail REIT concentration in those funds.  Retail in the form of malls is dying and the REIT funds with large holdings in companies like Simon (SPG) are under performing their potential, IMO.

I share this concern regarding REIT funds, and would prefer to not buy in to shopping malls or other forms of low-quality sprawl. In that case, which individual REIT stocks do you recommend? Can I purchase these via Vanguard commission free ETFs?

Classical_Liberal

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Re: To REIT or not?
« Reply #8 on: July 30, 2018, 01:34:59 PM »
I hate to make individual stock recommendations, as then I feel responsible for the outcome for someone other than me.

With REIT's I tend to look for value, so you have to look at the books, dividend history, etc.  I start my search by looking at the highest dividend payors and work backwards to see why they are valued low. I also try to not overweight in a particular sector, so I look for something I don't own yet.  Only 5-6% of my total allocation is in REIT, so if I "f-up" it's not the end of the world. 

All of that being said, the only REIT purchase I made this year was with my Roth contribution back in Jan.   I got OHI, a healthcare REIT, for about 10% below it's current market value.  It's a solid company with good history of dividend payouts that ran into snag with one of it's Lessees, a nursing home company.  They wrote off some heavy losses pending the bankruptcy of the nursing home system last year.  My educated guess paid off pretty well as they have kept up their dividend (about 10% then, 8.5% now) and OHI fared well in the bankruptcy. It's trading ex-dividend as of Friday so price is down a bit. 

PLEASE make your own decisions though.

jpdx

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Re: To REIT or not?
« Reply #9 on: July 30, 2018, 09:58:31 PM »
Thank you C_L.

On second thought, I'm not comfortable with stock picking at all. I should probably go with VGSLX/VNQ despite my reservations about dying malls and sprawl.

What I really want may not exist -- or does it? I'd like a low-cost fund or commission-free ETF that invests in a diverse array of REITs that excludes or minimizes those sectors.

HeadedWest2029

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Re: To REIT or not?
« Reply #10 on: July 31, 2018, 08:09:37 AM »
Curios, but is it possible the bearish thesis of brick and mortar retail has already played out and that has already been reflected in the price?  Don't get me wrong, I'm totally bearish on retail commercial real-estate long term, but a contrarian might point out that the death of brick and mortar has been overblown with most sales still happening in person, and the problem was more that in the US we overbuilt and have since contracted to more appropriate levels.  In other words, most of the pain is over.

All to say, I'm skeptical of my own ability to have this nailed down and index everything

boarder42

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Re: To REIT or not?
« Reply #11 on: July 31, 2018, 08:19:15 AM »
whats your investor policy statement say - invest that way - if you dont have one make one.  i'm currently revising mine to include REITs but you need to evaluate where to put those REITs as they have different tax implications -  I think 10-30% REITs make a ton of sense due to their lack of correlation to equities.  and if you use Tyler's calculators at portfolio charts it allows for higher safe withdrawal rates - keep in mind the data only goes back to the 70s but it allows for higher withdrawal rates and a safer FIRE when REITs are introduced.

jpdx

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Re: To REIT or not?
« Reply #12 on: August 01, 2018, 01:15:36 AM »
Touche. I just finished my IPS and feel much better. Thank you.