REITS

[surpasspro]

I have about 5% of my portfolio in REITS (VNQ).  For tax purposes I have them in my ROTH IRA.  What percentage of your portfolio do you have in REITS?  I'm looking to re-balance and not sure if I should add more taking it up to 10%.  Thoughts?

[Stimpy]

0% BUT, I have my reasons for staying away from REITs in straight stock form, or ETF.   Not saying get out, as you have your own reasons to be in them in the first place. 

As for re-allocation.  That is a personal risk question.  I am sure some (or many) will be like me, and have a 0% allocation, some will have a larger allocation then 5% or 10%, but it's how much risk (cause there is always risk, even with etfs) that you want to take. 

 I think you need to ask yourself WHY do you want to up the allocation?   Is it just for the dividend?  Are you about to get more involved in that space?  Or is there another reason?

[NorCal]

I have 10% of my portfolio devoted to "alternatives".  Of this, 1/3 is gold, 1/3 is US REITS (SCHH) and 1/3 is International REIT's (DRW).

I'm considering buying a rental property.  I'll drop the REIT's if I ever do.

There's no "right" answer to this.  I like having some REIT's for the purpose of diversification.  Others don't claim it's necessary.

While some will argue you get REIT exposure through an index, they aren't a material percentage of the S&P 500.  If I remember correctly (I could be wrong about this), REIT's make up something like 0.2% of the cap-weighted S&P 500.

In the end, your long-term performance won't vary much by including them or excluding them as a small percent of your portfolio.

[surpasspro]

REITS have outperformed the S&P 500 in the past 30+ years.  I'm not going to list links, but you can google it.  I own a rental that I live in and instead of buying another rental, I'm looking to have real estate be more of my overall portfolio.  I do like the dividend. I guess the allocation is all based on one's risk for sure.

[chasesfish]

I own two REITs that total 6.5% of my portfolio.  Here is what I do personally, but your mileage my vary.

I stay away from VNQ.  I'd rather pick one or two companies that are specialist in specific property types that I find to be an acceptable risk profile relative to their return.  I can look at the properties they own, who the tenants are, and how much debt the REIT carries against their portfolio.  I used to be a commercial lender so I'm pretty familiar with looking at this stuff.   Similar to buying actual real estate properties, you have to be price disciplined on buying REITs.   A good REIT can be a bad investment if the price is too high.  Personally I think names like American Tower and Public Store are trading at insane valuations and I don't want to own them.  Great companies, horrible valuations.

The names I own are EPR and STAG, but all in I bought them at more than 20% below the price they are trading at today.

If you want to own REITs, put together a list, do your research, then decide what your required return is.  Then sit on your hands and wait for the market to go so haywire and buy.  REITs can be driven down overall by either the stock market going down or by interest rates going haywire.  I've only been investing in them for 10 years, but it seems about every twenty four months a good deal shows up.

If we're in for a lower return for longer period of time, some of these names are a decent risk adjusted return in the mid 5% range.

[Boofinator]

For tax purposes I have them in my ROTH IRA.... Thoughts?

I have considered converting my Roth IRA into a REITs fund, under the theory of 1) diversification and 2) the zero tax load in the IRA should in theory make REITs competitive with the stock market even if it slightly underperforms on an earnings basis, since the price should be lowered to reflect the higher tax drag experienced by most investors.

[chasesfish]

@Boofinator - REITs are best held in a tax deferred account

[Boofinator]

@Boofinator - REITs are best held in a tax deferred account

I agree*, though I only have a Roth IRA and my 401k plan does not have a REIT option. So for me, the non-taxed account or taxable account are my only two options.

*Due to the lower expected returns relative to stocks (is there another reason?).

[NorCal]

I read an interesting counter-point to putting REIT's in tax deferred accounts.  REIT's are such a small part of my portfolio that I admittedly haven't given it much thought, or scrutinized the advice closely.  Still, this might be an interesting read for those who have material dollars in REIT's.

https://seekingalpha.com/article/4158333-advantages-reits-taxable-account

[BicycleB]

If we're in for a lower return for longer period of time, some of these names are a decent risk adjusted return in the mid 5% range.

@chasesfish, are you saying that at current prices, it appears that the REITs would return roughly 5 1/2% /year after inflation? Or nominal?

[smoghat]

I am FIRE’d because of a REIT, got to love them.

I had a property worth $2.5 million but a REIT paid $4.5. They offered $5 million sight unseen, and then asked me if I’d bargain down to $4.5. Painful, but I did it. Put the rest into Vanguard funds. Life is good now and I make more than I did from that property from the market plus I can sleep at night.

[chasesfish]

If we're in for a lower return for longer period of time, some of these names are a decent risk adjusted return in the mid 5% range.

@chasesfish, are you saying that at current prices, it appears that the REITs would return roughly 5 1/2% /year after inflation? Or nominal?

5.5% should be an after inflation number.  REITs should grow their dividends at least by the rate of inflation due to underlying increases in rent they are getting.   Dividend increases that are more than 1-2% above the rate of inflation are tough for a REIT to sustain.

[chasesfish]

I am FIRE’d because of a REIT, got to love them.

I had a property worth $2.5 million but a REIT paid $4.5. They offered $5 million sight unseen, and then asked me if I’d bargain down to $4.5. Painful, but I did it. Put the rest into Vanguard funds. Life is good now and I make more than I did from that property from the market plus I can sleep at night.

^ This is an awesome comment.  REITs are great for sellers, they can raise public money at 5-6% cap rates and pay those to property owners who might get 7-8% from other buyers

[ChpBstrd]

Better question: Do public REITs offer enough diversification benefits to deserve a larger-than-market allocation?

I.e. if they were weakly correlated with the S&P, but had similar expected returns, a large allocation would be worthwhile for the rebalancing opportunities. Otherwise they are just another sector. Many oil majors yield higher than VNQ.

[chasesfish]

Better question: Do public REITs offer enough diversification benefits to deserve a larger-than-market allocation?

I.e. if they were weakly correlated with the S&P, but had similar expected returns, a large allocation would be worthwhile for the rebalancing opportunities. Otherwise they are just another sector. Many oil majors yield higher than VNQ.

They probably don't.  I haven't been willing to buy a share of VNQ due to valuation for three plus years.  When the market starts tanking, it gets sold too due to margin calls.

[Steeze]

My AA is (45% US, 15% Int, 10% EM, 15% REIT, 15% BND)

Right now I am looking at raising cash for a rental which will come from the REIT allocation, driving it close to 0% over the next 3 months.

Edit: new allocation excluding cash will be:
(50% US, 20% int, 10%EM, 20% BND)

[harvestbook]

The last correlation number I saw between REITs and the total market was .79. Not a lot but it's some diversification. I hold 10 percent, split between US and ex-US.

[shinn497]

Outside of the REITs in my normal index funds I don't overweight. Especially have learning from ben felix they do not contain any extra priced risks.