07 Jul Should I invest in a REIT?
Q. What is a REIT, and should I invest in one?
A. REIT stands for Real Estate Investment Trust.
These are publicly-traded stocks and they give investors a way to invest in commercial real estate without being a landlord. Instead, the REIT is the landlord.
REITs are tied to all aspects of the economy, allowing you to gain investment exposure to office parks, apartment complexes, hospitals, nursing homes, storage facilities, industrial parks, infrastructure, student housing, shopping malls and more, said Jim Marchesi, a certified financial planner with Mill Ridge Wealth Management in Chester.
“REITs are companies that own or finance income-producing real estate,” he said. “You invest in a REIT by buying stock of a public REIT on one of the major exchanges, or you can invest in public non-listed or private REITs.”
Marchesi said there are two main types of REITs: Equity REITs and Mortgage REITs.
Equity REITs invest in and own properties, collect rent and buy/sell properties, he said, while Mortgage REITs deal with mortgages on real estate properties by lending money to REIT operators. They also buy and sell mortgage-backed investments, collecting interest on the loans and securities.
Because of the way a REIT is structured as an entity, a REIT is required to distribute at least 90 percent of its net income to its shareholders annually, said Brian Power, a certified financial planner with Gateway Advisory in Westfield. That means a REIT can be a good investment for someone looking for income, given that the dividends paid by a REIT can be higher than the average stock.
But make no mistake about it, a REIT is a stock and should be part of your stock market portfolio versus using it as a bond substitute, Power said.
“REITs went down 75 to 80 percent in value during the 2008-2009 market crash,” he said. “In the proper percentage and mixed in with other stock market asset classes, REITs can be a great investment to help diversify your portfolio.”
Power said you should have caution in the current interest rate environment.
“If you believe that interest rates will continue to go up then you may want to think twice about buying REITs at this moment,” he said. “Most REITs purchase their real estate with loans so when interest rates rise, their costs to carry their properties go up.”
This can hurt their earnings, which could cause their prices and dividends to go down, he said.
Marchesi agrees that interest rates are worth watching, but said that it’s doubtful that interest rates are going to go straight up for a long period of time. He said then the recent weakness could provide an opportunity to add REITs to a long-term portfolio, and then investors could add more over time as values become more compelling.
REITs can come in handy for diversification.
“REITs have historically had a low correlation with the broader market, so it is logical to include REITs in a diversified long-term investment portfolio,” Marchesi said. “Also, REITs are a natural inflation hedge.”
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This story was first posted in July 2015.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.