REITs 101: Building A Diversified REIT Portfolio

Welcome back to our final article in the series on mastering REIT investments! So far, we’ve covered the basics of REITs, the different types, and the key metrics to evaluate their performance. In this article, we’ll focus on strategies for building a diversified REIT portfolio.

You can find the other articles in this series below:

Part 1: Understanding the Basics

Part 2: The Seven Types of Equity REITs

Part 3: Six Key REIT Metrics to Watch

Let’s dive in to Part 4: Building a Diversified REIT Portfolio.

Building a REIT Portfolio: Strategies for Diversification

Diversification is key to managing risk and ultimately maximizing returns in your investment portfolio. Many use REITs to generate both growth and income for their overall stock portfolio.

If your goal is to own more than one REIT, it is wise to think of them as your “REIT portfolio”. Here are some tips for effective diversification and optimization.

1. Diversify Across Property Sectors

There are several types of equity REITs, including Residential, Office, Healthcare, Hospitality, Data Center, Retail, and Industrial. By investing in REITs across these different sectors, you can reduce the risk associated with any single property type.

Example: If the retail sector is struggling due to the rise of e-commerce, having investments in data centers or healthcare REITs can help balance your portfolio’s performance. But ultimately, you want to invest in the sectors you understand the most. 

2. Diversify Geographically

Real estate markets can vary significantly across different regions. Investing in REITs with properties in various locations can help mitigate the impact of regional economic downturns. Look for REITs with diverse geographical footprints, including international exposure if possible.

Example: A REIT with properties in both urban and suburban areas, across multiple states or countries, can offer more stability than one concentrated in a single market. 

3. Focus on Quality and Performance

While diversification is important, it’s equally crucial to invest in high-quality REITs with strong management, solid financials, and a track record of performance. Use the key metrics we discussed—such as FFO, AFFO, and occupancy rates—to identify the best candidates for your portfolio.

Example: A REIT with consistent FFO growth, high occupancy rates, and a reasonable debt-to-equity ratio is likely to be a more stable investment for the risk-averse investor.

4. Monitor and Rebalance Your Portfolio

Regularly review your REIT portfolio to ensure it remains aligned with your investment goals and risk tolerance. The point of the review is to ensure that you still want to own the REITs and that you are comfortable with your position size. The simplest strategy is to rebalance your portfolio on a regular schedule (perhaps once a year) to maintain the desired level of diversification and risk.

Example: If one sector becomes overweight due to strong performance, consider reallocating some of those gains into oversold sectors to maintain balance.

Conclusion

By diversifying across property sectors, geographic regions, and different types of REITs, while focusing on quality and performance, you can build a resilient and profitable REIT portfolio. If you are looking for consistent income from your portfolio, REITs are worth a look.