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Placing Your REITs In The Proper Type Of Account

A Strategic Approach to REIT Investing Introduction Are you looking to expand your investment portfolio with real estate investment trusts (REITs)? As an avid reader of Jussi Askola's articles on REIT investing, I've gained valuable...

A Strategic Approach to REIT Investing

Introduction

Are you looking to expand your investment portfolio with real estate investment trusts (REITs)? As an avid reader of Jussi Askola's articles on REIT investing, I've gained valuable insights into selecting the right REITs to own. While I previously focused on REIT exposure through ETFs and CEFs, retirement has granted me the time to evaluate individual REITs. In this article, I'll share some essential criteria for choosing REITs and discuss the importance of placing them in the proper type of account.

Selecting REITs with Alpha-Rich Returns

When it comes to REIT investing, the options seem endless. Whether you opt for an ETF, CEF, or mutual fund, you gain broad exposure to the REIT universe. However, this also means you inherit the good and the not-so-good. To seek alpha-rich returns, it's crucial to identify quality REITs that align with your investment goals. Jussi Askola, a respected contributor, suggests the following criteria for selecting REITs:

(1) Overweight Small-Cap REITs: Small-cap REITs often present attractive valuations, with an average of just 12x funds from operations (FFO). By focusing on quality small caps valued at 10x cash flow or lower, you can tap into potential growth opportunities. This is in contrast to overpriced large caps, which trade at an average of 20x FFO.

(2) Focus on Superior Sectors: Rather than blindly investing in sectors like retail, office, and hotels with uncertain long-term prospects, consider sectors with more resilient fundamentals, such as net lease, storage, and specialty.

(3) Avoid Bad Apples: Some management teams prioritize their own pay over shareholder returns. To mitigate this risk, skip REITs with poor track records and significant conflicts of interest.

(4) Buy Below NAV: Overpaying for REITs can dampen long-term results. Pay close attention to the net asset value (NAV) and seek to invest in REITs that are trading below their estimated NAV.

(5) High Yield Now: Real estate is an income-driven investment. Targeting a solid average dividend yield of around 8% allows you to rely less on stock market appreciation and outperform in a flat market.

Evaluating Current and Potential REITs

As I assess my own REIT holdings, I've identified a few notable options:

National Health Investors (NHI): This REIT owns hospitals, medical offices, assisted living facilities, and retirement centers.

National Health Investors

Source: www.nhireit.com/portfolio-2/

Omega Healthcare Investors (OHI): Specializing in long-term care properties, OHI focuses on sales/leaseback transactions within the industry.

Omega Healthcare Investors

Source: Map of Our Locations

Global X SuperDividend REIT (SRET): If you prefer the convenience of an ETF, SRET tracks the Global SuperDividend REIT index, which comprises the 30 highest dividend-yielding REITs worldwide.

Cohen & Steers Total Return Realty (RFI): This fund aims for high total return through current income and capital appreciation. RFI's top holdings include a mix of well-established REITs.

Invesco Global Real Estate (ARGYX): For those seeking high total return and exposure to real estate and real estate-related companies, ARGYX offers an attractive option. It has been recommended by the Morgan Stanley allocation algorithm.

Please note that the above images are for reference and should not be considered investment advice.

Choosing the Right Account for Your REITs

Deciding which account to hold your REITs in is a crucial step in optimizing your investment strategy. Consider the following factors:

Tax-Advantaged Accounts for High-Yield REITs

Currently, my REITs are held in tax-advantaged accounts due to their high-level of current income, ranging from 5.4% to 8%. Although the new tax laws exempt 20% of REIT dividends from taxes, I prefer to keep high-yielding REITs in these accounts. As for lower-yield REITs, I find it more suitable to hold them in taxable accounts. It's worth noting that CEFs and mutual funds may incur capital gains, which could be lost in tax-advantaged accounts. For the most tax-efficient approach, consider the specifics of each REIT and consult with a financial advisor.

A Strategic Approach for the Future

Looking ahead, I plan to double my REIT holdings by incorporating the valuable ideas shared by Seeking Alpha contributors. With a diverse range of REIT options available, I've also discovered useful tools like PortfolioVisualizer to help manage my accounts effectively. By backtesting portfolios and comparing performance, I've found that REITs have historically provided strong returns and diversification benefits, especially in periods of low correlation with the broader market.

In Conclusion

REIT investing offers a wide array of possibilities. Whether you prefer the convenience of funds or seek guidance in selecting individual REITs, there are options tailored to your investment style. As you build your portfolio, consider the criteria for selecting alpha-rich REITs and ensure that you place them in the appropriate type of account. By following a strategic approach, you can maximize the potential of your REIT investments and enjoy the benefits of diversified income streams.

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