I’ve spoken to a lot of investors who are still scared of real estate after the housing bubble burst in 2008. These folks have a lot of cash on the sidelines, and they’re desperate for income, but they’re too scared to jump into real estate.
Usually when investors express these fears, I show them this chart – how SPDR S&P 500 ETF and the SPDR Dow Jones REIT ETF acted leading up into the financial crisis. The latter only holds real estate investment trusts (REITs), which are companies that rent out real estate and pass most of the rental income to shareholders as dividends.
Note how RWR outperformed SPY both before and after the financial crisis?
Think about that for a moment. Real estate beat stocks even during an economic crash that was all about—you guessed it—real estate.
You might be wondering how that’s possible, especially if you know someone who lost their shirt during the crisis. Many Americans lost their life savings and even their homes to the Great Recession. Others who barely survived the crash ended up owing more on their homes than those houses were worth. So why didn’t this happen to REITs?
One word: management.
It’s a dirty word nowadays, since we’re in a bull market and passive investing is all the rage. But in reality, active management tends to outperform the dumb money when it comes to almost all asset classes—and this is doubly true for real estate.
In short, REITs survived the crash better than your house-flipping neighbor because they’re run by professional experts who make careful and strategic investments in real estate. That alone is why REITs are a great place to keep your money, but there’s another good reason: income.
RWR has a 3.9% dividend yield, which is twice SPY’s 1.8%. And RWR’s dividend is on the low end. In fact, there are many REITs out there paying dividends of 6% or more.
So how do we go about choosing those big-yielding REITs? It’s actually pretty easy. Let me show you how it’s done.
Rule #1: Look at FFO
The first step is the easiest, but it’s something a lot of people don’t know to do. Look at FFO.
FFO stands for funds from operations, a relatively obscure metric that…