Among advisors and institutional investors, real estate investment trusts, or REITs, are often considered a separate investing category from stocks and bonds. REITs have been middle-of-the-pack performers recently relative to other sub-sectors. Equity REITs, which invest in real estate, are currently outperforming mortgage REITs, which essentially make commercial loans to finance properties.
At various times, commercial properties such as storage units or shopping malls are the leaders within the equity REIT category. Currently, several hotel and hospitality REITs are outpacing other types. A series of industry acquisitions since the start of 2013 has contributed to strength in the hotel property sub-sector.
Sotherly Hotels (SOHO), Strategic Hotels & Resorts (BEE), FelCor Lodging Trust (FCH), Ashford Hospitality (AHT) Pebblebrook Hotel Trust (PEB) are just some of the hospitality REITs showing strong technical performance.
But when it comes to equity REITs in general, it makes sense why a particular industry is singled out. We see it in other sectors: Biotech, for example, is notoriously challenging to understand thoroughly and requires very specialized knowledge on the part of investors and analysts. Real estate investment also has its own body of knowledge and is uniquely sensitive to interest rates, demographic trends, economic shifts, and other factors. Because of these singular traits, REITs can be good portfolio diversifiers. I tend to avoid making too many sector bets based on what some pundit or other says on TV or in print, but REITs are somewhat of an exception to that general rule.
For starters, REITs, unlike other stocks, offer you a ready-made basket of investment properties. You could say they are somewhat similar to ETFs, in that sense. (And for the ultimate ease when it comes to REIT investing, you could simply buy a vehicle such as the Vanguard REIT ETF (VNQ), which is essentially a basket of REITs.)
REITs also offer unique tax advantages, in which the trust pays no federal income tax.
In addition, because the property owners collect rents, there is always an income stream, and, of course, they receive income when a property is sold. The recurring revenue model is a proven one in many businesses, and it works in your favor if you are a REIT owner.
Finally, for those wanting more exposure to real estate, REITs offer liquidity that you just can't get by investing in the properties yourself. Real estate is often referred to as a "passive investment," but there's nothing passive when your tenant calls at 3 a.m. because the toilet is flooding, or your rental house needs a new roof. It's a whole lot easier to hit the "buy" button on a REIT or a fund of REITs.
REITs frequently, though not always, have fairly low correlation to other equity indexes. That's another reason why they could be good portfolio diversifiers.
One additional thought: People tend to think "residential" when they think of real estate. That's understandable, because for most of us, our real estate ownership experience is limited to being homeowners. And many people were burned by the residential real estate meltdown, which soured them on the entire sector. Commercial real estate, which I've been discussing here, has very different characteristics. Keep that in mind when you are looking into REIT investments.