Investors should consider REITs
Real estate investment trusts (REITs) should be considered when constructing a portfolio. A REIT provides greater diversification, potentially higher total returns and/or lower overall risk. In short, its ability to generate income along with capital appreciation makes it an excellent counterbalance to stocks, and cash. A REIT can be a profitable way to establish enhanced returns but requires legal talent to ensure that it is the best option.
The correlation of the S&P 500 with REIT indexes is very low so the cash generated by a REIT continues even in a stalled economy. Bonds are the normal alternative to stocks, but there is room for using a REIT as well. Large buyers of REITs are exchange traded funds, pension funds, endowments, foundations, insurance companies, and bank trust departments.
Not all the various types of REITs can be discussed in this article, so the basic rental-property REIT will be outlined. A few types of these funds are residential, apartment, business office, health care, and farmland. Investing in basic rental properties This is a very old practice of owning property and leasing it out. A person will buy a property and rent it out to a tenant. The owner/ landlord is responsible for paying the mortgage, taxes and costs of maintaining the property. Ideally, the landlord charges enough rent to cover all of the aforementioned costs and may also charge more in order to produce a monthly profit, but the traditional strategy is to be patient and only charge enough rent to cover expenses until the mortgage has been paid, at which time the majority of the rent becomes profit. Furthermore, the property may also have appreciated in value over the course of the mortgage, leaving the landlord with a more valuable asset. According to the U.S. Census Bureau, real estate has consistently increased in value from 1940 to 2006, then proceeded to dip and rebound from 2008 to 2010. Beside the historic uses of REITs, new REIT’s are coming on board, involving timber, casinos, storage facilities, cell towers, and even billboards.
The down side of REIT’s is competition. For example, an office-complex REIT in a location with other office complexes can cause too much competition and cause rents to be pressured downward and possibly even cause the borrower to default.
The most important matter is finding the right property in the right location. You want to pick an area where vacancy rates are low andwhere people willwant to rent. I personally favor REITs that are in smaller towns and fulfil the needs of the particular town, for instance an office REIT that will attract tenants with the right amenities— especially all the hightech features needed in a modern business — and will be perceived as a high-end office facility. That’s just one approach; there are many-many others.
The property REIT holder’s motto is “LOCATION, LOCATION, LOCATION.”
The REIT that has been aggressively advertised lately is for “senior living facilities.” I may be wrong, but I have a problem with the very high “promised” returns. First of all, we baby boomers will not be entering into retirement homes for years. Plus we are healthier than our par- ents and are expected to live longer. The rates of expected returns are not promises. The articles of incorporation guide their action and one section concerns return on investment. Read the fine print before buying.
SamDeLuca is a registered investment advisor. As an RIA he legally represents his clients as attorneys and CPAs do. He has been a certified financial planner for 17 years. His specialty is helping people to invest for retirement. Prior to being an investment advisor, he worked for a CPA firm.