3 REITs better than an investment property

These 3 REITs are much better choices than an investment property in my opinion.

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The main housing markets of Melbourne and Sydney are now clearly in decline. A fall of 1% may not sound much, but on a $1 million home that鈥檚 $10,000 on paper down the drain.

Investors were already betting on gains based on the fact that owning properties requires ongoing cash losses, also known as negative gearing. It was only worth stomaching losses for capital gains. Speculation is a dangerous game to play.

But, there are other ways to invest in property without the huge transaction costs, low yields and questionable growth potential of residential property.

Commercial property in the shape of real estate investment trusts (REITs) on the ASX is an option. They usually have attractive yields and also offer more potential capital growth. Here are three ideas:

Arena REIT No 1 (ASX: ARF)

Arena is one of the country鈥檚 largest childcare landlords with 2017 properties at the end of FY18. It has a very attractive 100% occupancy, a weighted average lease expiry (WALE) of 12.9 years and it achieved a like-for-like rent increase of 2.6% in FY18.

It has a predictable income stream and pays a quarterly distribution. In FY19 management expect a distribution of 13.5 cents per unit, meaning it has a FY19 distribution yield of 5.7%.

National Storage REIT (ASX: NSR)

National Storage is the largest self-storage provider in Australia. Real estate prices in the country, particularly capital cities, have grown at strong rates and that has helped National Storage.

It has increased the demand for affordable storage solutions for people wanting to store items in a cheaper per-square-metre location than a bedroom. It has also allowed National Storage to increase the price it charges for its space.

It has a FY19 distribution yield of at least 5.8%.

Rural Funds Group (ASX: RFF)

Rural Funds is my favourite REIT. It鈥檚 a farm landlord with a very diversified property portfolio of cattle, vineyards, poultry, almonds, cotton and macadamias.

Its farms are spread across different states and different climactic conditions, meaning it鈥檚 a lot less risky than owning a single farm.

Management aim to increase the distribution by at least 4% a year and so far Rural Funds has achieved this.

Rural Funds is currently trading with a projected FY19 distribution yield of 4.8%.

Foolish takeaway

I believe the above three REITs will deliver much better total returns than residential property over the next few years. However, rising interest rates may become problematic for the REIT sector too.

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Motley Fool contributor Tristan Harrison owns shares of ARENA REIT STAPLED and RURALFUNDS STAPLED. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED. The Motley Fool Australia has recommended National Storage REIT. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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