The real estate investment hiding in your 401(k)

You might already own a piece of a mall, data center, or other property without even realizing it—via Real Estate Investment Trusts or REITs. Here’s more about this highly misunderstood investment from John Worth, an economist who sizes up REITs regularly at the industry’s trade association, Nareit.

Q: When did you invest in your first REIT? “Around 2009, near the end of the financial crisis, I was starting to see signs of a housing recovery. I wanted to express that in my personal portfolio, but I couldn’t do that directly with real estate. REITs turned out to be the proxy. I bought my first REIT index fund, and it performed quite well since I caught it on the upswing. Years later, I ended up on the investment committee for my 401(k) plan and pushed to add a REIT. So I started as an individual REIT investor long before I ended up as executive vice president for research and investor outreach at Nareit.”

Q: What do many people have wrong about REITs? “When people hear the word ‘REIT,’ they think ‘office.’ But REITs span a broad range: retail, residential, industrial, self-storage, healthcare, senior housing. About 170 million Americans live in rental homes owned by REITs, and many people own REITs and don’t even realize it. Most people don’t pick individual REITs; they get exposure through their mutual funds or 401(k). In the same way mutual funds were created to give Americans access to a diversified basket of stocks, REITs were introduced in 1960 to do the same for real estate.”

Q: How do REITs perform compared to stocks? “Over the last 25 years, they’ve outperformed the S&P more than half of those years. Over the past two months, as rates moved higher, REIT share prices are down 10%, but still up near 8% year to date. Beyond returns, REITs offer diversification and historically perform well during inflationary periods. Most broad equity portfolios have only around 2% to 3% REIT exposure; we’d argue that’s not enough. A better range is 5% to 15%.”

Q: How do you think REITs compare to owning an actual house? “I own a house, which is an okay investment, though it can sometimes feel like a money pit. The AC conked out and annihilated my appreciation in a weekend! That’s a common misconception: People think ‘I own a house, so I already have plenty of real estate exposure.’ But once you factor in costs, home returns tend to look a lot less impressive than people remember.”