Why you should consider REITs over an investment property

Australia is among the most property-obsessed countries in the world. There is supposedly nothing as safe as a house, there’s nothing like being able to physically touch the thing you own.

Of course, being able to touch something you own is not exactly the best investment strategy. I wouldn’t buy Woolworths Group Ltd (ASX: WOW) shares just because I can go to my local supermarket and hold one of the stock shelves with my own hands.

Investment properties have done well over the past five years due to a myriad of reasons. Population growth has been strong, interest rates have been falling, credit has easily flowed to borrowers, foreign investment has been strong and governments haven’t helped price affordability with access to negative gearing and restrictive zoning laws.

As you may have read about in recent months, nearly all of the above issues are now reversing. That’s why house prices are slowly but steadily heading down at the moment. Who knows whether the decline will stop in a couple of months, or we’re in store for two or three more years of decreases.

I can understand that investors want to invest in a different asset class to shares of companies. However, I don’t think residential real estate is the best place to invest at the moment, particularly because of the large transaction costs and the cash burn of negative gearing. Losing cash month to month only remotely works if the asset is going up in value.

I think real estate investment trusts (REITs) could provide the right mix of growth, income and safety. Commercial property has just as much chance of going up in value as residential real estate, but REITs will pay you cash instead of taking cash from you to own it.

Here are a few REIT ideas:

Rural Funds Group (ASX: RFF) is a quality REIT that owns farmland and leases it out.

Arena REIT No 1 (ASX: ARF) owns childcare buildings and leases them out to some of the biggest childcare providers in the country.

National Storage REIT (ASX: NSR) is the country’s largest self-storage provider, it is profiting from the high price of real estate.

BWP Trust (ASX: BWP) owns the buildings that are leased to Wesfarmers Ltd’s (ASX: WES) Bunnings, arguably Australia’s best retail business.

Goodman Group (ASX: GMG) is a global REIT that leases to various global businesses, Amazon is its largest tenant by income.

Foolish takeaway

Those are just some of the REITs on the ASX, although the above five would be some of the best choices in my opinion. Even so, I’m cautious on all property prices at the moment due to the rising interest rate over the next year or two from the RBA and in-particular the Federal Reserve in the US.

Instead, a better idea might be to buy shares of one of these top stocks that could keep growing regardless of what the economy does.

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