Buying property has historically been a popular means of improving your retirement prospects. It has previously offered impressive returns, and could continue to do so in the coming years.
However, real estate investment trusts (REITs) could be a better means of accessing the growth potential of the property market compared to purchasing properties directly. REITs offer greater diversity, lower costs and, at the present time, may trade on relatively attractive valuations. As such, now could be the right time to purchase REITs, rather than buying property directly, to boost your retirement prospects.
Building a diverse property portfolio is not an easy process. It requires a significant amount of capital to buy just one property – even though leverage can be used to make this process easier. As such, many property investors have a highly concentrated portfolio which can be vulnerable to risks such as a tenant failing to pay rent, one-off repair costs and void periods.
By contrast, diversifying using REITs is an easy process. Most REITs own a vast amount of property which reduces the aforementioned risks. Furthermore, an investor can decide to purchase multiple REITs that have exposure to different sectors, such as offices and retail. This could further reduce their overall risk, and help them to enjoy a resilient growth outlook over the long run.
As well as being required to raise a significant sum of capital to purchase a property, the additional costs of purchasing a property can be high. Legal fees, tax and furnishing/initial repair costs can reduce the potential profit that is on offer.
REITs are far cheaper to buy and hold. In fact, they are just like any other share when it comes to their costs, with there being a commission charged on their purchase and sale. This could mean that they offer a higher net return than purchasing a property directly, as well as greater simplicity during the purchasing process.
Since investors appear to be rather uncertain about the future prospects of the world economy, many REITs currently trade on low valuations. In many cases, they trade at a modest premium, or even a discount to, their net asset value. This could mean that they offer favourable risk/reward ratios.
In addition, REITs may be better placed to acquire properties that offer good value for money when compared to an individual investor. Their industry knowledge and large amounts of capital could mean they can purchase larger developments at a discount to their intrinsic values. Those opportunities may not be available to an individual investor who is seeking to purchase property directly.
REITS offer a low-cost means of capitalising on the growth prospects for the property market. Their diversity and low valuations could make them more attractive than buying property directly. As such, now could be a good time to focus your capital on REITS to improve your retirement prospects.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.