As different markets and the economy go through their cycles, different investments provide opportunities for long-term growth. The catch is, you have to be willing to take a little extra risk making an investment when the future of the economy or market is uncertain. You also have to have patience and stick with the plan.
The economy was suddenly and unexpectedly spun into a crisis with the spread of the coronavirus. This rapid shift in the market cycle may mean that real estate investment trusts (REITs) are a good investment right now, and it could be REIT investors' time to shine.
The real estate market took a major hit in 2008, bringing the economy down with it. Many people were forced to sell their real estate at a significant loss, and many others were afraid to make any investments.
However, many investors saw an opportunity. The ones who were willing to take the extra risk, were in a position to be able to invest, and were patient during the recovery made incredible returns. Property values more than doubled in some markets over the following 10 years. Fortunes were made.
This worked out for them because the real estate held its value. Real estate prices went down because people couldn't afford to buy and had trouble getting financing. The real estate remained the same, though. It just took a while for the prices to catch up with the value.
This same thing has been happening with REITs since the market fell in the first quarter this year. The price of REITs dropped significantly, but the value of them remained the same in most cases.
Don't get me wrong -- some REITs will probably never be the same after this, or at the very least may take several years to fully recover. Many others are already recovering nicely, and some have even hit their 52-week high in the second quarter.
Many REITs are still discounted. Even ones that felt little to no direct impact from the COVID-19 outbreak are still priced below their value. The values of REITs are closely tied to their real estate assets, so while the price may have gone down, the properties are still there, and many are still cash-flowing just as well.
Choosing the right REIT investments
You shouldn't start buying up every cheap REIT right now. You still have to be selective about your investments. Here are some pointers to keep in mind:
- Stick with REITs that meet your investment objectives.
- Look at what kind of financial impact the economic crisis has had on its revenue.
- Look at how its tenants are being affected. Consider the potential vacancies.
- Consider pre-coronavirus trends. Make sure the REIT was growing before the prices fell.
- Review its balance sheet. Look at how much debt it has, what the maturity schedule looks like, and if it's had to take on new debt to get through the pandemic.
- Compare the REIT you're looking at to the other REITs in the type of properties.
Most importantly, listen to your instincts. Some REITs may look great on paper right now, but if you feel like a certain property type is going to be in trouble, stay away.
Types of REITs to look at right now
Industries are being affected differently by COVID-19. Some are suffering terrible financial losses, others are mostly moving along as normal, and some are even doing better because of it. Consequently, the real estate where these businesses are located are also being affected differently.
These three types of REITs have real estate that really can't go anywhere. Other types of REITs have some great opportunities now as well, but these three will give you a great place to start.
Some industrial REITs primarily invest in warehouses and distribution centers. A lot of the businesses leasing these properties are doing more business now than ever. This doesn't mean the REITs are collecting any more rent right now, but having tenants whose businesses are thriving is a check in the plus column.
Industrial REITs were popular before the outbreak, and they will probably be even more popular in the near future.
Several apartment communities have had to defer a large percentage of their rental revenue, which has been a big blow to their cash flow. However, the demand for apartments isn't going anywhere. Multifamily REITs with a strong balance sheet and a lot of available liquidity should be able to survive and recover well.
Many healthcare REITs have had very little change in their revenue through the second quarter. COVID-19 is definitely reshaping the healthcare industry and the real estate that goes along with it.
Healthcare REITs with medical office buildings, specialty hospitals, outpatient facilities, and skilled nursing are likely to outperform those that are invested heavily into larger hospitals, assisted living, and independent living.
Don't wait too long
Real estate prices stayed down for a few years after the 2008 recession began, but REIT prices probably won't stay down much longer. There are still some great discounts out there, but the market has proven that it can change quickly.
Do your homework, follow the steps above, and be confident in your decisions. You just don't want to take too long. REITs are a good investment right now, so don't let yourself miss out on REIT deals that will have you kicking yourself five to 10 years from now.