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  • Writer's pictureBridget Sullivan Mermel CFP(R) CPA

How Do REITs Work in a Portfolio? | REIT Investing Explained

Real estate investing can be made easy with REITS, or real estate investment trusts. But many people don't know how REITs work in a portfolio.

In this video we’ll explain REITS, help you understand the different ideas about how real estate works with your net worth and talk about how much of your portfolio you might want to invest in REITS. By the end, you’ll understand how to think through if buy or keeping your REIT makes sense for you.

00:00 Welcome!

00:46 REITs Explained

01:45 Bridget's Approach to REITs

04:10 John's Approach to REITs

06:00 The Debate--More Things to Talk About

10:00 How Much Should You Have in Your Portfolio?

10:45 One Final Tip--Look at REITs' Track Records

12:00 Conclusion

Here's Bridget's firm website:

John's firm website:

For advisors around the US:

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Bridget: Real estate investing is made easier with REITs, real estate investment trusts. In this video, we're going to talk through real estate investment and how it works with your net worth. John and I have different opinions about how we work it into client portfolios. By the end of the video, you'll understand how to rethink or think through investing in your in REITs and how it works with portfolio.

Hi, I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois.

John: And I'm John Scherer. I have a fee-only financial planning practice in Middleton, Wisconsin. And before we dig into REITs, I want to remind all of our viewers to hit that subscribe button. That helps other people find our content on YouTube. So hit subscribe and then let's talk about REITs.

Bridget: Yeah.

John: This is great. I think one of the things that we were talking before we hit record is that REITs are an individual thing, like buying stocks. You can buy a company; you buy this REIT. And what we both talk about with regard to REITs is buying mutual funds, where a fund company doesn't buy one REIT, they buy 100 or 1000 or some diversification. So when we say REIT in this context, we're talking about REITs as a mutual fund option, right?

Bridget: Yeah, because the way that some investment properties are financed is that they put together an LLC, typically, and a bunch of people invest in it. And typically, the insiders get the first crack. So the developers and the people who work for the developers, and maybe the contractors, can all invest in it if they want to, and then they go to the bank for financing. And so, then if they need more money on top of that, that's when they go out to outside investors, and that's when these REITs are available. And again, we'll get conglomerated into a mutual fund.

John: Right. Tell me again, you mentioned in the introduction we look at things a little bit differently. I think REITs is an asset class really fit in somebody's portfolio, sort of in general. And you take a little different approach to REITs.

Bridget: Well, I think that having exposure to real estate in your net worth makes sense. How do you get that exposure? One way to get that exposure is to own a principal residence. So you own a property. You have your own little rate in a way. You've got your own rental real estate exposure by owning a house. And it protects you against inflation. And you have a lot of control over it.

You negotiate with a bank, you pay everything, you improve the property or not improve the property, you decide when to buy and when to sell, etc. So you have a lot of control over that. And then some people have rental property or vacation homes or another property, etc. So that's a secondary real estate in your portfolio, in your total net worth. And over your lifetime, I like to see people have around a third of their total net worth in real estate.

And that's like over your lifetime, so sometimes it's zero and then sometimes it's more; it just depends on what your situation is. I look at it as something to have in your entire net worth. And I say, okay, if you don't have enough exposure there and we really want more real estate exposure, that's when we talk about buying a rate and we put it in your portfolio. So I use those in very specific situations, and I don't have it as a general asset class in the client portfolios.

John: One of the things I like about how we both work together, and I think this comes from our membership and the Alliance of Comprehensive Planners is that real estate is an important part of most people's big picture, of their net worth, of their financial success. It's not, how are your investments doing? Or how much cash do you have in the bank? It's cash reserves and it's real estate and it's investments—this holistic viewpoint. And so, I really appreciate how you look at having a personal residence or a rental property or having a real estate mutual fund as being similar things.

I take a little different approach in that the real estate investment trust mutual funds that we both use with clients invest in slightly different things. And so, I take the approach that having personally owned real estate, like your vacation home and your primary residence, fits one component, but from a purely investment standpoint, having REIT mutual funds that invest in things like shopping centers and office buildings and farms, those sorts of things, that provides a different set of exposure to real estate.

And so, just a little different view on that. I think shopping centers these days have a lot different risk profile than personal homes. The same is true with apartment complexes and office buildings. And the reason that I use those in the portfolio is that there's some evidence that says real estate as a corporate entity, meaning those areas that I was just talking about, has different risk and return characteristics than large company stocks in the US, and small company stocks have a different profile than international stocks etc.

Real estate gives it a bit of a diversifying factor from just one way of looking at it. So I take a little bit of a different view on the same topic with things. And one of the things that I think is really important to point out is that with real estate, and sort of in general, there's limited upside; there's only so much value you can add through the real estate side of things to a property. And at the same time, there's limited downside as well; real estate doesn't always work out well as an investment, but it rarely goes to zero.

That office building, that personal residence, that vacation home can go down significantly, and people sometimes forget about that, but it rarely goes to zero. There's going to be some value. So there's some sort of floor, while there’s also some limited upside. So that's where, again, from an investment standpoint, I look at it in the portfolio.

Bridget: Okay. I was never in high school debate, but now I feel like I'm getting ready to debate. Right. Satisfied with this. Here're some more things to think about with real estate. Let's talk about if you've got a large mutual fund, an index fund that has everything in it. And let's talk about let's just use a couple of examples. Let's use McDonald's, and let's use Disney. I've heard McDonald's described as a real estate company with a hamburger stand attached.

John: Yeah, right.

Bridget: And I can't imagine that Disney doesn't have a lot of real estate. Actually, I have more personal experience with Starbucks and how they operate. And I don't think they own much real estate—at least every store. They're all company stores, but they rent.

John: Yeah.

Bridget: At least when I was working there, and I don't think that's a big surprise to anybody. But anyway, you've got a lot of real estate exposure anyway, baked in to McDonald's, baked into Disney, baked into a lot of the large companies. That leads me to think on the side of: why have a REIT? You've already got real estate exposure.

John: Yeah. That's a great point. Some of those companies, take the McDonald's and the Disney that have vast tracks of land, do some other investing. That does make it hard. You think about how consolidated various businesses are. If you want to invest in tech companies, they own real estate. And if you want to invest in a given company, they've got four different lines: they've got financials; they've got development; and they’ve got other things.

And so, it does muddy the waters a little bit. And that's a great point. It's not like you don't have any of these things. And so, this is to focus on those areas. The description that you made, Bridget, I think we get questions occasionally, saying, “I think the future is going to be in healthcare, so I want to focus on health care.” A couple of years ago when the pandemic hit, people looked at Zoom and virtual things and said, “I want to invest in virtual technologies because that's going to change the world.”

And I didn't argue with clients a couple of years ago, and I'm going to diverge from your debate, perhaps, and say, listen, those things make sense, but as I would explain to clients a couple of years ago, you've already got Zoom in your portfolio; you've already got these things, but it's this little sliver of things. And so, it's part of this big part. And my argument, such as it is, is that with McDonald's or some of the other companies, you do have some real estate, but it's a sliver compared to a focus.

And like the clients who say, “Geez, I want to invest in Zoom,” you're focusing more risk and return on that one area. And that is something that intentionally I choose to do is focus the risk and return on that real estate slice of things. So I guess I kind of agree with you on it, but then intentionally choose to take more of a concentrated position in that. And it's interesting. I want to make sure we talk a little bit about how much you should have in your portfolio and how to do it.

And this reminds me that this isn't like building an airplane, where there's one way to make sure that the plane has the right aerodynamics, so that it flies. There are different ways to approach it. It's not unreasonable to say, “Listen here. I've got personal real estate. My companies have some real estate. I don't need to have extra exposure to real estate. There's evidence that says, listen, having extra exposure to real estate gives you some diversifying factors. It's not like there's one way to accomplish these things. It has to be thoughtful. You have to think through those things.

For our viewers, how much real estate should you have? I agree with what Bridget says—something like a third in real estate on average. When you're younger, it's usually a higher percentage of your net worth. As people get older, it’s typically a lower percentage, but it fluctuates over time. From a pure investment standpoint, I look at it as saying, of your stock allocation, have something like 10% in REITs.

And of course, you have some bonds in your portfolio, so it's not 10% of the whole portfolio, but 10% of the stock allocation going to REITs gives you some of that diversification within the investment only portfolio. that's how I look at that for clients. Do you have any other takes on how to look at how much real estate somebody should have?

Bridget: I agree with what you're saying, but there's another point that I want to bring up, and that is if you're picking a mutual fund rate, what I would look at—and I'm interested in what your take on this is as well—is the track record. So if you're picking a mutual fund, that's a REIT—I'm just being conservative here—I would want one that has been around for quite a while, because I would want one that has been around since before 2008, so I could see their track record even with a huge downturn, because REITs are all going to be looking good after 2012.

John: Right.

Bridget: Because every real estate stock has done nothing but go up for the last ten years. But I want to see one with at least a 15-year, probably 20-year track record only because of the recent downturn.

John: Right. And that's maybe a little different perspective than some other things, some other types of investments, some other types of mutual funds. And I agree with that. This longer-term time horizon, especially with what's going on recently as real estate continues to go up seemingly every year. But if you go back 15 years, there are some pretty ugly times. How did they navigate that? I think it's a great tool for viewers as they're thinking, “Hey, this REIT thing sounds kind of good. Maybe I want to do some of that.” Take a little bit of a longer-term view as far as evaluating what the company fund managers have done.

Bridget: Right. So I think that's a great place to wrap up. I’m Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.

John: And I'm John Scherer. I have a fee-only financial planning practice in Middleton, Wisconsin. And if you like what you hear on Friends Talk Financial Planning, both Bridget and I are members of the Alliance of Comprehensive Planners (ACP), a nationwide group of fee-only, tax focused financial advisors. Visit to find an ACP planner in your area.

Bridget: And please subscribe to Friends Talk Financial Planning. That helps us with the YouTube algorithm and really helps us out. Thanks!

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.

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