I love real estate.
And I love it for one good reason.
Outside of owning a successful business, the top way to get rich is investing in real estate.
Most of us will never be real estate developers, but thanks to the miracle of REITs we can all own all sorts of sod real estate investments. We can own skyscrapers, warehouses, cell towers, apartment buildings, and just about any type of property we wish.
And here’s the best part about it: We never even need to speak to a real estate agent.
With the click of a mouse, we can become an owner of farms, senior living facilities, and even medical cannabis facilities.
So today, I want to take a deep dive into how you can make a ton of money investing in REITs as opposed to stocks.
According to Research, REITs Outperform Stocks Long-Term (And During High Interest Rate Environments)
We are always told that we should own stocks because they offer the highest returns.
I believed that for a long time, but the truth is that REITs outperform stocks over the long run with less volatility, according to several studies I have read over the years.
When I sat down to write this, I checked the National Association of Real Estate Investment Trust data, and I calculated that owing equity REITs since 1980 has provided a return of 11.61% a year and owning the S&P 500 during the same time frame has compounded at just 8.39%
An investor who put $10,000 in the widely touted index fund would have a little over $197,000 at the start of 2018. The REIT investor who took the far more boring path would have more than $582,000 in their account. Following conventional Wall Street wisdom would have caused our now senior citizen investor $385,000!
While I will continue to adore stocks as well – it’s a pretty close race, and long-term investment of both will make you money – history tells us REITs will make us more.
Yet, despite this overwhelming evidence in favor of REITs, people will continue to tell us it’s a bad idea to buy them when interest rates are rising. Your broker says so, and that guy on TV said so. They say that REITs are horrible investments in high interest rate environments.
Everyone also “knows” that Abner Doubleday invented baseball, that pilgrims always wore black, and that detox diets are good science. But none of that is true.
By the same token, it’s not true that REITs do poorly when rates are rising.
In fact, a recent research piece form Cohen and Steers, a leading real estate investment firm, confirmed the opposite is true.
Here are four scenarios, laid out by that report:
When the economy is growing faster than usual and rates are increasing, REITs do better. Rates usually rise when the economy is growing. During these high growth, high interest rate periods since 1981, REITs have averaged 12.5% a year while stocks have managed just 1.7%. For those of you keeping score at home, that’s almost 7.5 times what stock investors earned.
When the economy was growing fast and rates were falling, REITs soared by 25.3% and stocks returned 11.2% in the economic nirvana scenario.
When rates were falling and growth was slowing, REITs averaged 14.6% and stocks averaged just 1.2%. REITs in this scenario returned more than 12 times stocks!
When rates are rising and growth is slowing, REIT do not do very well. They lose about 2.7%. That’s not fantastic, but it’s still more than the stock market, which fell by an average of 9.3%.
So, REITs Do Better. But That’s Even Without Our Sabermetric Approach…
So the truth is that the earliest mention of baseball in America was in a diary entry from a Princeton student, John Rhea Smith, 25 years before Mr. Doubleday was born, and that REITs do very well unless rates are rising and growth is slowing.
You can do pretty well just owning the indexes. However, in just about every imaginable scenario owning REITs turns out better than the owning the stock market indexes.
I did a quick and dirty back test since the end of 2009 when the credit crisis began to ease. I found that owning all REITs has returned about 12.66% a year.
However, I then looked at buying just those REITs flagged a “buy” using my Sabermetric approach, given that they traded for less than their asset value, and the annual return increased to 14.56%.
As much as I love REITs, I love quality REITs at bargain prices even more.
Right now, we are finding bargain REITs with high-quality portfolios full of apartment buildings, office properties, farms, shopping centers, hotels self-storage facilities, and single-family rental homes that might qualify as Heatseekers.
If you’re not a member of our exclusive Heatseekers service, which gives you access to top dollar real estate picks, as well as three other categories of investment opportunities, click here to join.
Should the markets decide to sell off some more, there will be more on my list.
Real estate driven by intelligent numbers makes money.
I like money. Therefore, I love real estate.
It’s just math really.