What if I told you, you could make a 14% annual return on your investments? Sounds too good to be true right? But that’s precisely what real estate funds have delivered over the past three years. Now, I wouldn’t bet my grandma’s secret cookie recipe that it’s going to stay this high. But, for those of you feeling down in the dumps by the ever-so-low interest rates, these funds still hold a bit of sparkle and offer the chance for some rather tempting dividends.
Now, here’s the skinny – most real estate funds mainly throw their money into real estate investment trusts (REITs). These guys practically live and breathe real estate, whether it’s buying, managing, or selling properties such as swanky office complexes, bustling retail centers, or cosy apartment buildings. For those of you not in the know, by law, REITs have to give most of their taxable earnings back to shareholders. So, even with recent spikes in share prices, REITs continue to dish out quite the yield, currently hovering around 3.5%. And that my friend, stands in stark contrast to the measly 2% from the S&P 500 index. Granted, REIT income does come with a bit of a snag; it doesn’t qualify for the preferential tax rate (generally sitting at 15%) that applies to dividends from stocks. But hey, it still trumps the 1.6% yield offered by 10-year Treasury notes. Not too shabby, right?
**Is there room to grow, you ask?**
Look, I won’t sugarcoat it – during economic downturns, both property values and rental rates might take a nosedive. However, with the current expansion stretching for over seven years, most economic brains trust aren’t anticipating a recession anytime soon.
Here’s some more good news for REITs – they’ve been granted their very own VIP booth in the Standard & Poor’s market indexes, including the fancy S&P 500. This could very well amp up the limelight on REITs, and perhaps even coax more fund managers into investing, possibly pushing share prices higher in the long game.
**Ever thought about alternative opportunities?**
I know REITs have had quite the party since the market bottom, and I echo Michael J. Magiera, the co-manager of the Manning & Napier Real Estate Fund’s sentiments. This is why he’s scouting out unconventional REITs with a safety buffer, like Weyerhaeuser, a timber REIT. If timber prices go down, this company can just watch its trees blossom and increase in value over time. As Magiera puts it, “you get paid to wait.” His fund has outpaced 97% of similar funds over the last five years. Other unusual prospects include REITs specialising in self-storage, student housing, and outdoor advertising.
And don’t overlook international opportunities either; property markets outside the U.S. often offer better deals. Over the past five years, global REIT funds have lagged behind their U.S.-focused peers. Still, according to Gregg Fisher, manager of the Gerstein Fisher Multi-Factor Global Real Estate Securities Fund, which plops over 40% of its investments internationally, says you’re more likely to find better deals in Europe than in New York City.
For those of you looking for a steady, long-run option, check out the Vanguard REIT Index Fund. It’s a reliable choice, offering a 3.1% yield with low expenses of just 0.26%. Also making our Money 50 list of top mutual funds and ETFs is Cohen & Steers Realty, which offers a 2.4% yield and has outperformed 80% of its category over the past 15 years.
Finally, if you’ve liked what you’ve read, you might want to check out a few tomes on Wall Street and investing penned by the columnist, John Waggoner.
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