Real Estate Investment Trusts (REITs) a Different Way to Invest in Real Estate

Real Estate Investment Trusts are securities that invest into real estate and can be traded on the major exchanges or held in a private trust for individual investors. Individuals can invest into REIT’s by buying the shares of mutual funds or shares of a non-traded REIT.

Some REIT’s invest into a mix of real estate types, while others focus on an industry segment such as hospitality or medical facilities. This flexibility gives investors the opportunity to diversify their overall portfolio and then also within the asset class of real estate by choosing REIT’s that invest into various industry parts.

Advantages

High Yields- Many investors are attracted to REIT’s for their high interest rate yields. REIT’s have on average shown investors an 8% rate of return over the past 10 years, although the returns can be as high as 15% depending on the structure and the portfolio’s holdings. These high yields can be reinvested or taken as a current income stream depending on the investor’s financial objectives.

Flexibility- Many investors are interested in owning real estate as a portion of their portfolio, yet they are not interested in owning real property. Owning REIT’s allows an investor the opportunity to own real estate without owning real property, and with the added flexibility of being able to liquidate traded shares quickly on the market. Also, investors who do not have the capital to buy a property on their own in cash can do so by pooling their investment capital with other investors.

Diversification- Real estate is considered to be its own asset class and when added to a portfolio’s mix, it can provide for additional diversification for an investor. Traded REIT’s will react to the supply and demand factors of the market, while non- traded REIT’s do not, and can offer a more stable investment choice for investors who are looking to buy and hold real estate. Overall, REIT’s can offer an important diversification piece for an investor’s portfolio.

Disadvantages

Liquidity- Some REIT’s are not publicly traded, making them more challenging to liquidate. Non-publicly traded REIT’s are designed for an investor with a longer term investment objective and time frame; it is typically recommended for most non-traded REIT’s to have a 5-15 year time frame before they require access to their investment capital.

Inverse Relationship to Interest Rates- REIT’s have an inverse relationship to interest rates within an economy; when interest rates are rising, the rate of returns on REIT’s will decline and vice versa. If the investor owns a REIT that is not publicly traded when interest rates become unfavorable, it may be challenging to liquidate the investment to reposition their portfolio. If the REIT is traded, it will be easier for the investor to reposition their portfolio accordingly to interest rate movements in the economy.

When is a Good Time to Buy?

Generally speaking, like other investments, the best time to buy REIT’s is at a low price compared with earnings. One needs to consider the yield and dividend payouts as well.