Real estate investment trust (REIT) investors suffered greatly as a result of the Federal Reserve’s aggressive rate increases in 2022 and 2023. REITs purchase real estate, lease it to occupants, and trade it like stocks on the stock exchange. Their robust growth track record and substantial dividends have made them a popular choice among investors.
Despite usually being less volatile, the Vanguard Real Estate Index Fund ETF saw severe losses in 2022—even more than the Standard & Poor’s 500. Given that this index has frequently outperformed the S&P 500 over extended periods of time, this underperformance may also come as a surprise.
But after the Fed decided to hold interest rates steady in December 2023 and signaled that rate cuts are imminent, REITs might be ready for a comeback in 2024. This is good news because rising rates reduce the real estate value held by REITs.
1. Selling at the bottom
The basic principle of investing is to buy low and sell high. Therefore, you should consider whether you are selling solely because the REIT has declined or because you believe the market will fall even more as a result of fundamentals when it falls significantly, as it did in 2022.
The expectations of millions of potential investors are factored into the price of a REIT stock. These investors examine various data points such as tenant issues, economic growth, and vacancies to arrive at an estimate of the business’s value. Although the price is always subject to change later, investors’ perceptions of REITs are frequently altered by fresh information.
The market frequently makes accurate future predictions. It’s possible to receive good news without realizing it, and in many cases, this good news is a result of investors’ general decline in pessimism. You would have lost money and missed out on the gains that REITs have seen since November 2023 if you had sold them in 2022. Assuming robust fundamentals and supply-demand dynamics persist, astute investors recognize that purchasing the dip can yield benefits rather than selling when the price declines.
2. Not analyzing a REIT carefully
Whether you intend to purchase, sell, or hold onto a REIT, it’s critical to conduct a thorough analysis of both the REIT and the market. Real estate investment trusts (REITs) are involved in a wide range of industries, including data centers, hotels, healthcare, and retail. There isn’t a “one size fits all” solution because the dynamics of each of these sectors vary greatly.
Think about these things along with the particular circumstances at each company before deciding how to move forward. Do renters make their rent payments? Is the amount of debt acceptable? If the economy declines in the future, will the business need to raise money?
Naturally, those are just a handful of the things you should think about before acting. Make decisions based on the facts, not the other way around.
3. Letting fear keep you from buying good REITs
Especially if you’re getting a big discount compared to what you believe the REIT will be worth in the future, it might be a mistake not to purchase more if you’ve done your research on the company and the long-term outlook appears promising. It’s crucial, then, to resist letting fear turn you away from a good deal.
That being said, not every REIT that is on sale is a good deal. Furthermore, when fresh information becomes available or investor confidence wanes, even excellent companies may lose value. This is one of the reasons why a lot of financial advisors advise investing in stocks using dollar cost averaging. You can average into a stock by spreading your purchases out using this strategy.
Even though REITs are renowned for their consistent dividend payments, they will struggle to meet their dividend obligations if their rent isn’t being collected. Investors may therefore have already factored in a significant chance of a dividend reduction. However, if there is no dividend cut, the stock might be ready for a rise.
It may be a good idea to purchase shares of the REIT if its fundamentals are strong and it has room to grow going forward, provided that the stock is not priced for this possibility. However, you’ll frequently need to face your fear. Clearing up any doubts can be achieved by conducting a thorough analysis of a REIT.
4. Only concentrating positions, not diversifying
It may be a mistake to concentrate solely on the REITs you currently own if you’re looking to purchase any. Alternatively, it might present a chance to purchase some of the top-performing stocks that were previously perceived as being too costly. By doing this, you can capitalize on the benefits of diversification and increase the number of high-quality companies in your portfolio at a time when their prices are lower.
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For instance, in recent years, the expanding digital economy has been very beneficial to certain REIT sectors, particularly those related to telecom towers, data centers, and warehouses. The REIT market appears to have other promising subsectors, such as manufactured homes, senior housing, and healthcare facilities.
You can lower the risk in your portfolio and possibly add some premium gems by diversifying. Considering the substantial debt that is typical of REITs, it also helps mitigate the risk of one blowing up.
Long-term real estate investing is made more appealing by REITs, but cautious caution is required to avoid straddling the line between blind optimism and narrow-minded pessimism. The market’s decline in 2022 may present a sizable opportunity to position your portfolio for decades of excellent returns, which will likely include a steadily increasing dividend stream. However, you should weigh this advantage against the risk of losing money, particularly if the economy contracts once more.