Many of us own our practices and the buildings in which we work. Well, this is one way to understand investing in REITs.
Real estate investment trusts (REITs) are investment vehicles that cover many sectors, including health care and many other industries, such as storage facilities, commercial real estate, and many others. For doctors seeking investments that provide income, REITS may offer one alternative.
Of course, with all investments, discussing this option with your financial advisor is important as all investments, including REITs, also have a risk for capital loss.
Real estate investment trusts (REITs) are publicly traded companies that primarily invest in income-producing real estate properties or mortgage-backed securities. REITs are designed to provide investors with a way to access income from real estate investments without directly owning or managing properties themselves. They offer a unique blend of income generation and capital appreciation.
There are also ETF REITs, that compose of many REITs bundled into one to provide more diversification.
Diverse sectors, diverse opportunities
One of the key advantages of REITs is the diversity of sectors they cover within the real estate market. Different sectors can perform differently based on economic conditions, allowing doctors to tailor their investments to their specific needs and risk tolerance. Here are some of the major REIT sectors and why they may be appealing to doctors:
Health care REITs: Health care-focused REITs invest in various health care-related properties, including hospitals, medical offices, and senior living facilities. Doctors may find this sector appealing due to their familiarity with the health care industry and the potential for stable income, driven by long-term leases and the increasing demand for health care services.
Residential REITs: These REITs primarily invest in apartment buildings, single-family homes, and student housing. Doctors looking for consistent rental income may find residential REITs attractive, especially in markets with strong demand for housing.
Retail REITs: Retail-focused REITs own and manage shopping centers, malls, and other retail properties. While this sector has faced challenges due to the rise of e-commerce, well-located retail properties can still provide steady income. Doctors may appreciate the diversification potential of this sector.
Office REITs: Office REITs own and lease office buildings. This sector may offer opportunities for both income and potential long-term appreciation for doctors looking to invest in their own medical office spaces or other office properties.
Industrial and logistics REITs: With the growth of e-commerce and the need for efficient distribution centers, industrial and logistics REITs have gained attention. Doctors interested in the logistics and supply chain sectors may consider these REITs, which can benefit from the rise in online shopping.
Potential returns: income and growth
REITs are known for their income-generating capabilities, which can be particularly appealing to doctors seeking to supplement their income or build wealth over time. REITs are required by law to distribute at least 90 percent of their taxable income to shareholders in the form of dividends, making them reliable sources of regular income.
Additionally, doctors can benefit from the potential for capital appreciation as the value of the underlying real estate properties appreciates over time. While past performance does not indicate future results, many REITs have provided competitive total returns when considering income and growth.
Risks and benefits for doctors
Let’s explore some of the risks and benefits doctors should consider when investing in REITs:
Income generation: REITs offer a consistent stream of income, which can be particularly advantageous for doctors, who may have irregular income due to self-employment or private practice.
Diversification: REITs provide diversification benefits by offering exposure to various real estate sectors. This can help doctors spread their risk across different segments of the real estate market.
Liquidity: REITs are publicly traded, providing doctors with liquidity, unlike direct real estate investments that may require time-consuming transactions.
Interest rate sensitivity: REITs can be sensitive to changes in interest rates. Rising interest rates can lead to lower demand for high-yield investments like REITs, potentially impacting their share prices.
Market and economic factors: REITs can be influenced by economic conditions, such as recession or inflation. Economic downturns can affect occupancy rates and rental income for properties in the REIT’s portfolio.
Management quality: The performance of a REIT is highly dependent on the quality of its management team. Doctors should research and select REITs with experienced and competent management.
Sector-specific risks: Different REIT sectors can have unique risks. For example, retail REITs face challenges from e-commerce, while changes may influence health care REITs in health care policy.
Conclusion: Building wealth and financial security
For those of us seeking a balanced investment portfolio that combines income generation with growth potential, real estate investment trusts (REITs) offer a promising option.
With diverse sectors, reliable income, and potential for capital appreciation, REITs can align well with many of our financial goals. However, consulting with a financial advisor before adding REITs to your investment strategy is important. When used wisely, REITs can contribute to building wealth and financial diversification.
Amarish Dave is a board-certified neurologist with over 20 years of experience in both neurology and active stock investing. In addition to his medical career, he holds a background in business from the University of Michigan and has successfully passed the SIE exam administered by FINRA. Dr. Dave is founder, FiscalhealthMD.com, a website dedicated to educating doctors at all stages of their careers, ranging from residents to retirement, about financial planning.