- These assets have absolutely crushed the S&P 500 since the turn of the century.
- U.S. tax law requires them to distribute 90% of their taxable profits as dividends.
- The Federal Reserve’s interest rate cut will push up their prices even further.
I recently reviewed the best investment I ever made.
By my calculations, the annualized return on my initial investment has been 16.5% per year.
That’s almost triple the average return for the investment in the S&P 500 Index for the same period — every year, for nearly 25 years.
And that’s just the asset value. I’ve also experienced an income yield averaging 6.2% per year.
That adds up to a combined annual return of 22.7%!
Of course, some years have been better than others. And three times during that period, I experienced significant negative annual returns due to declines in the broader asset class.
But overall, this investment in the S&P 500 has been both remarkably profitable and low stress. All I’ve had to do is let it ride.
There’s nothing stopping you from enjoying similar returns for yourself.
In fact, you can achieve those returns with far less effort than I did.
Space: The World’s Best Asset Class
This wonder asset is my 165-year-old stone cottage in the beachside village of Muizenberg, just south of Cape Town, South Africa.
Of course, in addition to the spectacular financial returns I’ve enjoyed, I’ve also benefited from the use of the property. The only downsides are the cost of maintenance and property taxes.
I’m not suggesting that you go looking for a cottage on the African coast. I got lucky on that one — the combination of a good location and the spectacular growth of property demand around Cape Town in the postapartheid era did the heavy lifting for me.
Nevertheless, my African seaside cottage illustrates a basic fact about real estate. It’s what underpins my spectacular gains … and the gains you can make.
The simple fact is that space on this planet is limited. If you can get your hands on the right space (or spaces), you can enjoy returns that beat almost any other asset class.
In that respect, the building on my South African property contributes little to its value. The key thing is the land itself and the fact that it’s located a stone’s throw from one of the most popular coastlines in global tourism.
The secret to making boatloads of money from real estate is identifying land that benefits from location in a similar way.
Let the Professionals Do It
As I said above, I got lucky with my housing investment. Things could easily have gone the other way. I certainly don’t attribute my great returns to my expertise in real estate.
That’s because, like most of us, I have a general understanding of what makes property valuable, but I’m not an expert.
In fact, whenever I invest in real estate for purely financial purposes, I hand the decision over to the experts.
Those experts are the people who run real estate investment trusts (REITs).
REITs are specialized companies that invest in real estate of all kinds — from residential to industrial and scientific. The people who run them know more about these markets than anyone else on the planet.
It’s easy to invest in a REIT. They trade just like stocks. And because U.S. tax law requires them to distribute 90% of their taxable profits as dividends, they typically return much higher yields than industrial and other companies.
In fact, the FTSE NAREIT Composite Index has absolutely crushed the S&P 500 since the turn of the century:
How do we account for the spectacular outperformance of real estate?
The secret lies in the fact that REITs don’t buy just any old real estate. They target real estate that occupies particular spaces with potential valuations that are much higher than others.
For example, in my Bauman Letter, I’ve recommended REITs that specialize in acquiring data centers that can house the massive servers on which the modern internet economy relies. Others target urban warehouse space that’s highly sought after by e-commerce companies that want to shorten delivery times.
And it’s precisely the expertise the managers of these REITs possess in identifying and acquiring these properties that make their returns so much higher than the rest of the real estate market — and the stock market itself.
Poised for a Big Jump
Along with dividend companies and bonds, REITs are one of the primary types of fixed-income investments.
REITs have been more attractive than dividend payers and bonds for a while now.
I track a watch list of 50 REITs. Ninety percent of those deliver annual yields over 3%. More than half of them deliver yields of over 5%.
Declining earnings threaten to squeeze the dividends of many U.S. companies.
The Federal Reserve just announced it’s cutting interest rates. That will put downward pressure on bond yields.
That means there’s going to be a flood of money moving out of dividend stocks and bonds and into REITs.
That’s going to push up the stock price of REITs.
So, in addition to enjoying excellent dividend yields from REITs, you’re also going to benefit from appreciation in their stock prices. These assets have returned double or triple the return of investments in the S&P 500. And we recently acquired several REITs in my Bauman Letter portfolio.
So, with the Fed’s rate cut, now is the time to add REITs to your portfolio … so you can profit from real estate without having to lift a finger.
Editor, The Bauman Letter
P.S. I’d love to hear your own experiences with investing in REITs. If you can, please take a moment to fill out this brief survey.
Also, I’ll be talking next month at this year’s Total Wealth Symposium , an annual investment event in beautiful Amelia Island, Florida.