Real estate investment trusts — REITs — are essentially mutual funds that buy real estate instead of stocks. While some experts argue that REITs provide portfolio diversification and are a great way to derive passive income, there are also a slew of misconceptions around them.
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What Are REITs, and How Can They Create Wealth and Financial Security?
Real estate investment trusts (REITs) offer a way for people to invest in real estate without directly taking on all the risks and complexities of owning property, said Dutch Mendenhall, CEO and co-founder of RADD Companies.
According to him, they are worth considering for several reasons. First, he said, REITs are typically run by real estate professionals, so you’re likely to make more informed investment decisions and experience less risk.
They also generate income through rent and property appreciation, so you can get steady cash. In addition, he added that they have a lower investment threshold.
“With REITs, you can invest in large-scale, institutional-quality real estate with a smaller upfront investment than you’d need for direct real estate investments,” he said. “Overall, REITs offer a way for people to get a piece of the real estate pie while avoiding some of the risks and headaches that come with owning property directly.”
Yet, several myths about REITs are preventing investors from adding these to their portfolios.
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Myth: REITs Are Illiquid
Some people assume REITs could take the same time and effort to sell that a direct real estate investment could take.
“But because most REITs are publicly traded, they’re just as simple to sell as any other stock,” said Todd Stearn, founder and CEO of The Money Manual. “One exception is public non-traded REITs, but these are not listed on exchanges and aren’t what most new REIT investors will be buying anyway.”
Cliff Ambrose, FRC, founder and wealth manager at Apex Wealth, echoed this sentiment. He said that while REITs may not offer the same level of liquidity as stocks, they are traded on major stock exchanges, allowing investors to buy and sell shares relatively easily compared to direct real estate investments.
“Recognizing this level of liquidity can reshape investors’ perceptions and highlight the accessibility of REITs within a diversified portfolio,” Ambrose added.
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