REITs Are a Great Way to Invest in the Housing Market
Many people who are investing in the housing market will buy properties in order to flip them. The rate of return can be attractive, but it requires a great deal of work on the part of the investor. In addition, supply can often be tight, forcing the investor to take some risks in house flipping. Due to COVID-19, there are some more attractive investment opportunities in the market that are entirely passive. Real Estate Investment Trusts (REIT) have been decimated by the market turmoil but have now begun to turn a corner. Assuming that REITs can sustain some of the reduced dividends that they have declared, this may be a more advantageous way to play the housing market. Even for those who do not flip homes, buying housing through REITs right now can prove highly beneficial in the long run.
Many people are unaware of what a REIT is and how it can help their portfolio. Very simply, a REIT borrows money at lower interest rates and uses it to find or own properties that produce a higher rate of income. The REIT will make money off of the spread between its cost of capital and the income that it receives in rentals or repayment of loans.
REITs Are on Sale Because of COVID-19 Market Pressures
In the past, REITs had been a steady source of income for investors who appreciated the dividend payments of 7-10% each year. However, COVID-19 has been hard on the REITs. The threat to them has been the fact that their tenants may not pay their rents or borrowers would default on loans to them. As a result, many REITs have been forced to liquidate positions to meet margin calls or reduce the leverage that they use to achieve their returns. The price drops in REITs are even steeper than they saw after the Great Recession wreaked havoc on the real estate market.
Some of the drops in price has been justified by the fact that the book value of the REITs has fallen. In addition, nearly all REITs have been forced to cut the dividends that they pay to shareholders, some more significantly than others. However, the current environment presents one of the greatest buying opportunities for REITs in a generation.
Most REITs have fallen by as much as 50% and some even more. Although REITs have rebounded from their lows at the end of March, most still have a long way to go to recover everything that they have lost since the start of COVID-19. In most cases, it will take REITs years to rebound in terms of the share price. However, you would not be buying a REIT these days primarily for share price appreciation.
Many REITs these days, even with their reduced dividends, still have yields well above 10%. For example, the Apollo Commercial Real Estate Finance REIT still pays a dividend of over 14%, even after cutting its dividend this past quarter. This is just one of many REITs out there that have suffered much more than is warranted due to the panic surrounding COVID-19.
The Going Is Starting to Get Better for REITs
Moreover, as the country continues to reopen and retail volumes stabilize, the concern over rent payments should evaporate. Retail REITs are already beginning to report that rents have stabilized and some of their near-term financial worries have dissipated. Nonetheless, the shares are still on sale.
The combination of some profits on the share price plus large dividend payments could lead to REIT investors realizing a 15-20% annual return for the foreseeable future. While this is lower than the profits of a successful home flipper, this is money that results from a passive investment.
There is still time for investors to play the housing market through REITs. While some of the easy money has been made by investors who had the guts to dip their toes in the water when the going was rough, many REITs are still trading for far below their book value. Investors should not be too concerned that the REITs have nearly doubled off their low and should look to future annual returns. While future dividend cuts are still a possibility, most REITs appear to have survived the worst of what COVID-19 has given them. In the meantime, zero percent interest rates from the Fed will give them more chances to make money over the next several years.
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