3 Reasons Why REITs Are Good For Beginner

Daniel Lee

3 hours ago4 min read

Finding the right starting point can be challenging for those just entering the world of investing. One investment vehicle that often comes up as beginner-friendly is the Real Estate Investment Trust (REIT).

But what makes REITs particularly approachable for those new to investing compared to other popular types of stocks such as our local banks and tech stocks like Nvidia or Amazon?

In this article, let us dive into 3 reasons why REITs may be an ideal choice for beginners to hone their skills as an investor.

1) Straightforward Business Model

One of the biggest advantages of REITs for beginner investors is their simple and transparent business model.

At its core, a REIT operates by acquiring properties and renting them out to tenants. The revenue generated from rental income is then distributed to shareholders in the form of dividends.

This straightforward approach contrasts with many other companies whose operations can be complex and multi-layered (for those conglomerate businesses), requiring a deeper understanding of intricate business models and market dynamics.

For beginners, this clarity makes it easier to understand how a REIT generates income, how it operates, and what factors could impact its performance. More importantly, it allows an investor to develop a sense of how the fundamentals of a company may affect the share prices.

As a beginner, REITs offer investors a straightforward business model that allows an investor to pick up basic fundamental analysis skills such as reading financial statements and assessing the health of a balance sheet without needing to decipher complicated revenue streams, business models or strategies as compared to starting with other types of stocks and shares.

2. Predictable Cash Flow

A major reason REITs are attractive to beginners is the relative predictability of their cash flow.

Unlike companies in more volatile industries, REITs benefit from the stability of real estate assets, which generally offer steady and reliable rental income without much deviation from the value of the assets.

This stability is beneficial for new investors as it reduces the level of market uncertainty and volatility while providing investors with a stable stream of dividend income which could further offset the impact of price volatility.

As beginners, REIT offers investors with the much need stability while allowing investors to dip their toes into the market and see how they would behave when faced with irrational price actions that happen from time to time.

This allows beginner investors to gain a better understanding of themselves as investors which would help them refine their emotional control and market discipline without exposing themselves to a high risk of irrecoverable losses as compared to starting with trendy instruments like cryptocurrencies or NFTs.

3. Easier Price Discovery

For beginner investors, determining the intrinsic value of a company can be a daunting process. However, REITs are more approachable in this respect as compared to other types of stocks.

This is because the factors influencing a REIT’s valuation — such as rental income, expenses, capital management and property values — are relatively transparent and consistent as highlighted in the previous two points.

Furthermore, metrics like Distributable Income from Operations, Occupancy Rate, Interest Rate Coverage Ratio, and Gearing Ratios are commonly used in REIT analysis and are easier to grasp compared to more complicated valuation methods needed for other types of stocks.

The combination of a straightforward business model and predictable cash flow means that beginners can estimate the intrinsic value of REITs with a higher degree of confidence. This makes REITs a more predictable and less intimidating starting point for those new to investing.

As beginners, REITs offer investors a good starting point to experiment with their valuation models. This allows investors to build a working model with a limited number of variables that impact the intrinsic value of REITs before they improvise their model to account for more complex and multi-layered business models.

Conclusion

While REITs have several characteristics that make them beginner-friendly — including a straightforward business model, predictable cash flow, and easier price discovery — it is essential to recognise their limitations.

REITs can be an excellent starting point for those new to investing, especially for building stable, income-generating portfolios. However, they may not be ideal for investors focused solely on wealth accumulation.

That said, if you are looking for an instrument to hone your skills as an investor instead of blindly investing in broad-based indexes, REITs are a good instrument for any beginner investors to start their journey before exploring other types of stocks and businesses.

If you would like to read my analyst report on Singapore Listed REITs, you can find them on my telegram channel:

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If you would like to learn about REIT investing, you can find my entire methodology in my eBook: Retire With REITs here:

If you are looking for personalized financial advice, I offer a 1-to-1, fee-only consultation where you will receive personalized strategies to design, implement and manage a profitable REIT portfolio. You can find out more about it here: