This post serves as an introduction to REITs as an asset class
Toyin is a 29-year-old professional working for a multinational in Lagos. She makes good money from her job, but she knows she can do more. She recently had to stop her side hustle; although it was fun and brought in a nice amount of passive income, it demanded too much of her time and energy.
For this very reason, Toyin is now considering investing in real estate. She considers taking on a mortgage for a house, which she can then rent out but soon finds that mortgages rates are too high.
Toyin calls her financial advisor to discuss the options ahead of her. After understanding her reservations and what she is looking for, he recommends Toyin invest in REITs.
The advisor goes on to explain that a REIT, short for Real Estate Investment Trust is an asset class that provides opportunities for real estate investors without having to manage the property. The REIT pools together capital from various investors to acquire and manager real estate properties and in return provides buyers of the REIT (unit holders) with shares in return. As a result, the unit holders will receive regular dividend payments from the REITs just like a mutual fund.
Toyin immediately senses that this is an asset class that is suitable for her risk appetite and investment horizon (she wants to buy and hold for the long term). She decides to ask her financial advisor (FA) some more questions.
Toyin: ‘What does a beginner like myself need to know about REITs?’
FA: The biggest benefits of REITs is the exposure to a number of real estate properties without having to manage them. What’s more, this asset class allows you to enjoy rental income from commercial properties (offices, malls, apartments, shopping centers) that would ordinarily be inaccessible. Furthermore, tax laws make it mandatory for REITs to distribute 90% of their taxable income to shareholders as dividends.
He continues. ‘ There are various types of REITs (equity REITs, mortgage REITs, and hybrid REITs). Investors benefits of real estate investment along with ease. REITs have historically provided investors dividend-based income, competitive market performance, transparency, liquidity, inflation protection, and portfolio diversification.’
Toyin: ‘Okay, this all sounds attractive, but I want to know about the risks. What’s the worst-case scenario? What are the real concerns associated with owning REITs?’
FA: ‘Good question, Toyin! Typically REITs are usually only good as income investments. Also REITs tend to be overpriced, and can be over-leveraged. Other points of concern are that REITs do poorly in times of rising interest rates, high property taxes can reduce profits, dividends are taxable, and its not the best option if you’re looking for capital appreciation. As we have seen recently, the current COVID-19 has impacted REITs, and we can’t be certain how the asset class will perform in the future.’
Toyin thanks her financial advisor, before asking him to send her some more information she can digest, after which she would call him to discuss further.
Toyin calls her financial advisor after a week. She has decided to invest in a REIT that provides long-term stability and regular payouts.
Her advisor recommends two investments for Toyin because of their stability, attractive dividend yield, and regular dividend payout. The first one is Schwab US REIT ETF (NYSE: SCHH) and the second one is Realty Income Incorporation (NYSE: O). What’s more, the stocks of both picks are also very liquid which will give her the benefit of cost averaging to acquire more of the stock on a monthly basis.
After Toyin thanks her advisor, she signs into her Chaka app to make her first investment in REITs.
Schwab US REIT ETF (NYSE: SCHH)
Source: Chaka (App)
Realty Income Corp (NYSE:O)
Source: Chaka (App)
Key Takeaways:
- Don’t be restricted by a high interest rate environment and consider investing in REITs
- You can buy US REITs on the Chaka app
Need to Know
| Real Estate Investment Trusts (REITs) | Corporations or trusts that use the pooled capital of many investors to purchase and manage income property and/or mortgage loans. |
| Unit holders | A person with an investment in a unit trust. |
| Rental income | The amount of money collected by a landlord from a tenant or group of tenants for using a particular space |
| ETF | An exchange traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies. |
| Cost averaging | An investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase |
