If you're looking to invest more money in real estate, you have choices. You could go out and buy actual properties and bear the risk that comes with owning them or enjoy a more passive and potentially less risky income stream by putting money into REITs.
REITs, or real estate investment trusts, are companies that operate different types of properties. The great thing about REITs is that they tend to pay higher-than-average dividends.
The result? A steady stream of income to look forward to. Plus, buying REITs is a great way to diversify your portfolio and dabble in real estate without assuming the risk that comes with having to maintain an income property and keep it perpetually occupied.
There are numerous REIT sectors you might choose to put your money into. Here are a few worth following this year, in particular.
Image source: Getty Images.
1. Industrial REITs
Before the pandemic, consumers were increasingly starting to purchase goods online. But over the past two years, digital sales have exploded. And that's fueled an uptick in demand for industrial space.
That's why 2022 could be a strong year for REITs that operate warehouses and distribution centers. As more and more consumers turn to the internet to order everything from apparel to groceries, industrial space is only apt to explode.
Furthermore, a number of well-known retailers are specifically investing in ramping up their e-commerce businesses rather than focusing on renovating stores or expanding their physical footprints. That's not a great thing for retail REITs -- but it's definitely a good thing for industrial REITs.
2. Residential REITs
In 2020, rental demand was so low that landlords in major metro areas practically gave away months of free rent just to lure in tenants. Now that the economy has improved and the demand for rentals is soaring, landlords are in a prime position to command higher prices.
That's why 2022 could be a solid year for residential REITs, which can run the gamut from mobile home parks to complexes with multifamily buildings. With residential property values soaring and mortgage rates rising, buying a home could be a challenge this year. So the demand for rentals could increase exponentially as 2022 chugs along.
3. Hospitality REITs
Hospitality REITs have taken a major beating during the course of the pandemic, especially early on, when travel came to a halt. But there's reason to believe 2022 will be a strong year for travel, and hospitality REITs are poised to benefit.
Recently, the CDC updated its COVID-19 guidelines in a manner that eases restrictions and makes it easier for the public to coexist with the virus. That could result in a huge uptick in travel, which could result in added revenue for hotels.
Furthermore, a number of large companies are finally making concrete plans to bring workers back to the office. And later on in the year, we could see a modest, but notable, revival within the business travel space. That, too, could be a boon to hospitality REITs.
Do these REITs belong in your portfolio?
To be clear, REITs are not risk-free investments. While things seem to be looking up for these three specific sectors, there are risks involved, too.
Oversaturation could hurt industrial REITs, while a drastic drop in home prices could hammer residential REITs. And hospitality REITs could suffer if another COVID-19 variant emerges that spooks travelers and causes them to stay close to home.
In spite of those risks, industrial, residential, and hospitality REITs come with a lot of upside. So it could pay to favor these sectors as you go about the process of adding REITs to your portfolio.
