Investing in real estate is one of the more tried-and-true paths to wealth. Yet many investors want to avoid being tied down with the maintenance and other issues that come with being a property owner. If you’re an investor who wants to profit from growth in the real estate market without being tied down to individual properties, now is a great time to invest in real estate investment trusts (or REITs).
Not every REIT is the same
Real estate investment trusts come in many varieties. These are not just mall owners (e.g. Retail REITS) that are still trying to figure out the obvious challenges of commercial real estate. REITs can own several multi-family residential units, healthcare facilities, and office buildings. Two of the most well-known REITs are Fannie Mae and Freddie Mac that invest in mortgages by purchasing them on the secondary market.
One of the reasons that REITs are such an amazing investment is that they offer investors the dual benefits of capital appreciation and regular dividend payments. REIT stocks often pay better than average dividends because they are required by law to pass 90% of their income to shareholders in the form of a dividend. And value investors also typically trade for less than their intrinsic value. Since 1980, REITs have generated annualized returns of 11.61% compared to the S&P 500 Index that has returned 8.39% in that same time.
Three REITs that are great buys now
The first REIT we're going to look at is W.P. Carey Inc. (NYSE: WPC). In the past year, WPC has outperformed both the industry with earnings of 37% as opposed to 17% but has also exceeded its historical performance. The company has an 89 on the Relative Strength Index (RSI) which means it is outperforming 89% of the market for the past year. WPC offers one of the highest dividend yields in the sector at 4.7%, and more importantly, W.P. Carey has been regularly increasing its dividend payments over the past ten years. One of the key factors to consider when investing in a REIT is the company’s balance sheet and W.P. Carey has one of the best in the industry. The stock price is up over 20% in 2019 which is creating some concern that it is overvalued, but with Fed becoming more likely to lower interest rates more in 2019, WPC seems like it will be navigating more favorable waters.
Another REIT for income-oriented investors to consider is Medical Properties Trust (NYSE: MPW). Health care looks to be a major part of the national discussion as we move into an election year. MPW has a large, international health care oriented portfolio that includes a variety of rehabilitation centers and regional hospitals. The company has a very attractive 5.6% dividend yield and at $17.87 per share as of this writing, it is just below an all-time high. MPW has been a consistent stock over the past five years, trading in a very tight range, the fact that it is starting to reach new highs as interest rates fall is very good for investors.
A REIT whose price is on a similar trajectory with MPW is MGM Growth Properties (NYSE: MGP). MGP is one of the largest names in casino gaming, convention centers, and hotels and has a market cap of 2.73 billion dollars. The stock is up over 10% in 2019 and pays a robust 6.36% dividend. MGM has only been listed since 2016, but it has already seen its dividend yield increase from 26 cents per quarter to 44 cents in early 2019. Analysts have been sending bullish signals with four analysts upgrading the stock from Hold to Buy. The consensus price target for the stock is $34.33 which would be over 10% from its current price of $29.40.
This is the right economy for REITs
When Federal Reserve Chairman Jerome Powell announced the Fed would lower interest rates, it was good news for REITs. Just like prospective homebuyers can enjoy the benefits of lower mortgage rates when interest rates are low, REITs benefit because – particularly for commercial property – rent becomes more affordable and occupancy rates increase.
However, like other cyclical investments, REITs are susceptible to the ups and downs in the real estate market. When interest rates rise, and more importantly, when the economy contracts, REITs can struggle. However, when the economy is growing – as it has been since this bull run started back in 2007 – REITs typically benefit from increased cash flow as properties fill up and rent prices increase.