Buy REITs to diversify into real estate? (Part 2 of 2)

November 14, 2013, by

real estate aerial view.jpgWhy, despite the misgivings listed in last week's blog, does Lars invest 20% of the trust in the Vanguard index REIT? First, he likes real estate, feels it's somehow a special investment. It's kind of the old "they aren't making any more of it" thing. They don't call it real (estate) for no reason.

OK, so that's pretty subjective: what else? The REIT he's chosen is both diversifying and diversified. That is, in a portfolio of mostly stocks and bonds, real estate acts a little differently. This is good. When stocks are down, REITs might not be. And the Vanguard fund is itself spread into all kinds of real estate, so he's not betting everything on just shopping centers, or apartments.

Also, the returns have been good, with this fund averaging almost 14% per year from the period 1972 to 2010 by combination of income and growth. That's really good.

Finally, a REIT is a liquid (easily bought and sold) way to be in real estate. As noted last week, one almost surely pays a premium for this feature, but it's an important one. Ask someone who had a bunch of leveraged rental homes in 2009 and needed to unload them.

Lars thinks REITs are overpriced right now, as evidenced by pretty low income yields (in the 3% range). Again, with his own money he's holding back from buying, but expects to have a chance to get in more cheaply when interest rates rise. REITs are a funny combination, seemingly interest-rate-sensitive in the short run like bonds, but having the ability to appreciate like stocks.