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Why Real Estate Investors Should Shift Their Gaze to Data Centers

Real estate has long been a path for individual investors to grow wealth, and those opportunities extend well beyond the American Dream of a home of your own, although that still remains the place for many to first dip their toes into owning a piece of land and the building on it.

But why stop there? You can buy properties, both commercial and residential, to flip or rent. You also can pool your money with others in crowdfunding opportunities or go the more traditional route with real estate investment groups such as limited partnerships and private and publicly traded real estate investment trusts (REITs).

Publicly traded REITs, in fact, are a great way for novice and experienced investors alike to enjoy passive income and share price appreciation, since REITs are required to pay at least 90% of their taxable income to shareholders. There are more than 200 publicly traded REITs right now, and they typically focus on specific sectors. There are office REITs, for instance, and industrial/warehouse REITs, and others that specialize in apartments or single-family rentals.

What they all have in common is providing entry at the price of a single share into real estate segments that would otherwise be inaccessible and too complex for the typical individual investor. A great example of that right now is data centers.

Image source: Getty Images.

Data centers soar as the world connects, and the cost of entry is high

Data centers have been around for a long time, but the days of shipping huge magnetic storage tapes to backup facilities are long gone. Today's data centers instead have grown into full-blown members of the digital superhighway, providing cloud storage and application support and real-time interconnectivity around the globe.

These centers lease their space to private and government clients alike and can support a single client or hundreds or more at a time. Their franchise depends on being highly secure, redundant, and reliable providers of real-time networking.

And they're very expensive. Industry pioneer Data Foundry pegs the cost of building a center at about $1,000 a foot, and then there's the $10,000 or more a mile to have fiber connected to it, and then hundreds of thousands of dollars a year in energy and other operation costs.

Or you can buy shares in a data center REIT, although you have far fewer to choose from than just a couple of years ago. The three pure plays trading right now are Equinix, Digital Realty Trust, and CyrusOne. You can also include Iron Mountain in that group, now that it's well on its way to transforming from physical record storage to data management. Switch, a smaller operator that plans to convert to a REIT this year, should join the list soon.

The list has been shrinking. Just in the past year, QTS Realty Trust was sold to Blackstone Group and taken private, and CoreSite was sold for $15 billion to cellphone giant American Tower as the largest of all REITs takes a stake in ownership of another critical piece of the explosive growth of 5G networks now underway. That's not all. CyrusOne has agreed to a $15 billion acquisition by KKR and Global Infrastructure Partners, a deal expected to close in the second quarter of 2022 that would also take this operator private.

Investors wanting to jump in now might look first to Digital Realty and Equinix. A $10,000 investment in these stocks a year ago at this time would now be worth just more than $12,000 and $11,000, respectively, and they're both reliable dividend stocks. Digital Realty currently is yielding about 2.9% and Equinix about 1.5%.

That's not a huge yield, but remember, yield goes down while the stock price goes up, and these are both very popular stocks in a hot sector that may just now be showing its potential. The big money sure thinks so.

And, certainly in the case of data centers, the cost of entry and complexity involved in investing in their stocks are dramatically less than trying to build one yourself or even in a partnership. These are not storage buildings. At least not of the traditional warehouse variety.

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Marc Rapport has no position in any of the stocks mentioned. The Motley Fool owns and recommends American Tower, CyrusOne, Digital Realty Trust, Iron Mountain, and Switch. The Motley Fool has a disclosure policy.


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