Scott Tominaga: Why Do REITs Make a Good Investment?

Real estate investment trusts (REITs) were created so that anyone could invest in real estate, says Scott Tominaga. REITs leveled the playing field that was only available to those with a high net worth. Today, anyone with an active online brokerage account and some cash can invest in REITs with just a few clicks.

REITs have been a great investment throughout the years, notes Scott Tominaga. Here’s a closer look at why investors should consider REITs.

Why REITs make a good investment

REITs offer several benefits that make them a great fit in any investment portfolio. These include attractive income, competitive long-term performance, liquidity, transparency, and diversification.

Attractive income

One reason REITs have generated significant returns over the long term is that they pay attractive dividends. For instance, as of 2021, the average REIT yielded over 3%, more than double the yield of S&P 500 stocks. That income adds up over time and makes up the bulk of a REIT’s total return over the long term, explains Scott Tominaga.

Many REITs have reliable track records of increasing their dividends every year. For instance, Federal Realty Investment Trust (FRT) raised its dividends for 56 consecutive years in 2023 — the longest in the industry. Many other REITs steadily increase their dividends at least once each year.

Competitive long-term performance

Historically, REITs have performed better than stocks, especially over long periods. For instance, over the last 45 years, REITs have produced an annual average total return (dividend income and stock price appreciation) of 11.4%. That’s just slightly less than the S&P 500’s return of 11.5% during that period.

Liquidity

Real estate is an illiquid asset, meaning investors can’t easily convert it to cash. For instance, suppose you needed to sell a single-family rental (SFR) property to cover a big expense. In that case, you’d have to list your property, wait for an offer, and hope you don’t run into any snags. It could take weeks or months before you’re able to convert your property into cash, depending on market conditions, explains Scott Tominaga. You’d also likely need to pay closing costs as well as a real estate agent fee.

On the other hand, if a REIT investor needs money, they can open their online brokerage account and sell shares anytime the market is open.

Transparency

Many real estate businesses operate with little oversight. Because of that, some real estate sponsors make decisions that aren’t always in the best interest of investors.

However, REITs are transparent. Independent directors, auditors, analysts, and the media all monitor REITs’ performance, notes Scott Tominaga. They also must report financial information to the SEC. This oversight gives investors a level of protection so real estate businesses can’t easily take advantage of them.

Diversification

REITs also allow investors to diversify their portfolios across the commercial real estate market, helping them reduce their exposure to the bond and stock markets. That diversification helps an investor lower their risk profile without negatively impacting returns.

Scott Tominaga is a professional in the hedge fund and financial services industry and is for all aspects of back office operations daily, including investor relations and marketing. Learn more about Scott and his background in investment by visiting this page.