Let's face it. The global stock markets are pretty scary for many people.
Daily swings have been as high as 10% this year. The result has many people looking for other ways to invest. REITs are an option many people find attractive. In this post, we'll offer our thoughts on how to find the best REITs in 2020.
What Is A REIT?
For those unfamiliar with the term, REITs are real estate investment trusts.
Here's an excerpt from an earlier post on what you need to know about REIT investing.
“REIT investing allows smaller investors to get into these properties without a significant investment. What is a Reit? Let's take a short walk back in history to see how they started.
Investopedia describes how Reits started:
“Congress established real estate investment trusts (REITs) in 1960 as an amendment to the Cigar Excise Tax Extension of 1960. The provision allows individual investors to buy shares in commercial real estate portfolios that receive income from a variety of properties. Properties included in a REIT portfolio may include apartment complexes, data centers, health care facilities, hotels, infrastructure—in the form of fiber cables, cell towers, and energy pipelines—office buildings, retail centers, self-storage, timberland, and warehouses.”
I won't go into the entire discussion of the requirements to call yourself a REIT. The Investopedia article does a great job with that if you want to take a deeper dive. The bottom line – REITs allow the “little guy” to invest in the same kinds of properties as the “big boys” always have.
You can do REIT investing via publicly-traded REITs via mutual funds or ETFs. You would buy and sell shares of these REITs like stocks, ETFs, or mutual funds.
There are also publically non-traded REITs. These are less liquid than publicly-traded REITs. They don't trade on national exchanges like mutual funds and ETFs. As such, they are not subject to the kinds of market fluctuations as publicly-traded REITs.”
What About Investing in Land?
Before diving into the best REITs discussion, I want to offer an alternative that many people think about but don't pursue – raw land. The main reason cited for not seeking a land investment is the upfront investment needed. However, there are land investments that offer lower initial investments. FarmTogether manages one of those investments.
FarmTogether is not a Real Estate Investment Trust (REIT). With FarmTogether, you select the farmland, its location, and the type of crops. You pick and choose. The investor has full control of where their money gets invested. Investors own units of an entity solely devoted to the ownership and operation of an asset. REIT shares, on the other hand, do not classify as physical ownership of a piece of real estate. You are not only at the mercy of that company management decisions, but you are also bound to their strategy, the properties they purchase, and ultimately to the stock market's constant instability.
FarmTogether offers a low-cost investment opportunity that allows investors to own real land. Real land is less subject to inflation and more stable than many other investments. Why? For one thing, we're not making any more of it. The law of supply and demand means it's likely to increase in value.
For those looking for cash flow, they offer that as well. The typical investments range from $10,000 – $50,000 per transaction. That $10,000 number is much more accessible than many of these types of offerings. And there are precious few funds that offer investments in farmland with cash flow.
I thought I'd start with this offering before getting into the best REITs discussion. Farmland is an investment that is not correlated with stocks and may offer similar returns. I always like to find unique investments that differ from others and offer similar potential benefits. FarmTogether checks those boxes.
Check out this FAQ page for more information.
Best REITs – Crowdfunded
Crowdfunded REITs are extremely popular right now. The reason is that investors can start investing in these REITs for as little as $500. These newer funds register with the SEC as exempt funds, usually under the SEC's Regulation Crowdfunding. Crowdfunding provides investors with smaller amounts of money to invest in things commonly only available to the wealthy. In crowdfunded real estate, non-accredited investors can play in the same playground as the big boys.
Here are your top three crowdfunded REITs
One of the more seasoned crowdfunded REITs, Fundrise has invested over $2.5 billion to date and has a history of above-average returns. There are three investment options available.
- Supplemental Income Fund – If you're looking for a real estate investment to generate regular income, choose the supplemental income fund.
- Balanced Fund – If you'd like some income and want your investment to grow, choose the balanced fund.
- Growth Fund – As the name suggests, the growth fund's focus is not on generating income. Instead, the goal is to increase the properties' value, so investors make money upon the properties' sale.
One of the attractive features is the fund's investment choices. Plus, they have a history that investors can review.
You can get more details and learn more about REITS and crowdfunded real estate in this review.
The investment strategy is sound. The investment team looks for multi-family properties (apartments, condos, etc.) with positive cash flow (renters) in good neighborhoods. The value add in their property selection comes from finding properties that need some work. We're not talking about a complete redo. Instead, the building might need a new roof, updated bathrooms or kitchens, or maybe a fresh coat of paint.
With the improvements, they can charge more rent when the leases expire and new tenants come on board.
Get additional details from this review.
Realty Mogul offers a rigorous property selection process that they feel provides an extra layer of safety to their investments. First of all, members of the investment team visit every property they add to their portfolios. Properties must meet the following minimum criteria for them even to consider them as investments.
- Properties must be well leased. At the very least, they must have leases in hand.
- They will not invest in ground-up deals. All properties must have a positive cash flow.
- Their real estate partners must have proven track records and experience managing real estate assets.
- They have over $2 billion in property value they've financed. Additionally, Realty Mogul paid out over $160 million to investors.
The minimum investment for their deals is $5,000. Both accredited and nonaccredited investors can invest.
Best REITs – Accredited Investors
Accredited investors are those with $1 million of net worth (exclusive of primary residence) or at least $200,000 annual income (single taxpayer) or $300,000 (Joint filing) in the last two years. There are many options for accredited investors. For the wealthy, real estate is one of their most significant investments. Here are some we like.
YieldStreet should be considered a fixed income alternative investment. The investment team's areas are investments in litigation finance, real estate, consumer, and commercial financing.
Getting into these alternative fixed-income areas has typically been limited to hedge funds and other institutional investors. Accredited investors can now access these alternatives with Yieldstreet. They have the experience and expertise you want.
They have multiple offerings from which investors can choose. The minimum and maximum investment depend on the offering chosen. The minimum investment is usually $10,000. Once again, that is much lower than many alternative investments.
You can read our review of YieldStreet here.
PeerStreet is another alternative investment in the real estate space. The team at Peer Street does not invest in properties. Instead, they invest in loans backed by real estate. The quality of the loans is directly related to the quality of the real estate backing the loans.
Typically, the loans they pursue have shorter terms and are not heavily leveraged. That means potentially less risky loans. Even though Peer Street Investments is for accredited investors, their minimum investment for most of these loans is $1,000. That allows investors to give it a try with a much lower initial investment.
Be sure to check out our review of PeerStreet to learn more.
Best REITs on Stock Exchanges
One of the most common ways to invest in REITs is by investing in publicly traded exchange-traded funds (ETFs). Unlike mutual funds that are priced every day, ETFs get traded like stocks. Investors can buy and sell them at the current public market price throughout the day.
The advantage of REITs that are ETFs is the simplicity of buying and selling. Most investors are familiar with the process of buying stocks, bonds, and mutual funds. So, investing in an ETF that is a REIT offers a familiarity that makes many feel more comfortable.
The downside is that these REITs do not offer the growth opportunities of many of the private REITs we have already highlighted. With that said, REIT ETFs are a logical first entry point for many investors.
Here are a few of the best REIT ETFs.
Vanguard Real Estate ETF
Vanguard is the largest and, arguably, the most recognized names in the mutual fund industry. The Vanguard REIT (VNQ) is one of the largest and most popular. Investors looking for consistent income should consider this ETF.
In typical Vanguard fashion, VNQ has a low expense ratio of 0.12%. The investment yield (income) provided is around 4%. That's a nice income in today's market. Like the vast majority of Vanguard's funds, VNQ is an index fund. That means its returns would closely mirror the performances of the MSCI U.S. REIT Index.
iShares Core U.S. REIT
iShares is another of the most recognized names in the investment world. They have a vast selection of ETFs covering most market sectors across the globe. The iShares Core U.S. Reit ETF (USRT) mirrors the return of the FTSE Nareit Composite Index. It has over 150 holdings, which include the largest 50 REIT companies within the FTSE Nareit Index. Expenses come in at 0.08%, which is lower than the VNQ of 0.12%.
Like many of the U.S. REITs, income is the primary benefit of USRT.
iShares Global REIT ETF
For further diversification into the REIT ETF space, consider the iShares Global REIT ETF (REET). As the name suggests, REET invests in REITs around the world, adding another layer of diversification. REET tracks the FTSE EPRA/NAREIT Global REITs Index. The fund invests in publicly-traded REITs in both developed and emerging markets.
A recent allocation showed that over 67% of the REITs were U.S. based companies. The next three highest percentages are Japan (9%), Eurozone (5%), Australia/Asia (4.5%), and the United Kingdom (4.2%).
International REITs often offer a potentially higher income yield than their U.S. counterparts. That makes adding a percentage in a global REIT beneficial.
Though not an exhaustive list by any means, I hope this list gives you a good place to start when considering the best REITs to consider in 2020. And please, don't discount the FarmTogether farmland investment opportunity. They offer a unique way to invest in an asset that has a fixed supply. That can be an excellent advantage when investing in an asset for both growth and income.