Are You Familiar With Real Estate Investment Trusts

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REIT

Are You Familiar With Real Estate Investment Trusts

By Steven Walsh

The average investor is not concerned with national business trends, population migration, or the stock market.  The average investor is interested in two-flats, rehabbing single family properties, or foreclosures.  Often times, a real estate investment trust (REIT), never crosses their minds.

Well, maybe all that should change as we prepare to look for alternative ways to make money and prepare for the bear of retirement that is staring us all down.  As the Chicagoland real estate investment arena gets more and more crowded with entry level investors, more savvy investors, and foreign competition, we must always remain open to new sources of income that could put us over the top.  What is this new opportunity?  Okay, it is nothing new, but it may be time you learned more.  With REITs reaching an all time high for popularity, now is as good a time as any to learn more about this powerful investment opportunity.

What is a REIT?

According to the National Association of Real Estate Investment Trust, a REIT is a company that owns, and in most cases operates, income producing real estate.  Some REITs finance real estate as well.  Many REITs are publicly traded corporations and you can buy shares in the company, similar to purchasing shares in any other business.

When Were REITs Formed?

In 1960, Congress signed into law the Real Estate Investment Trust Act and gave birth to the REIT in order to give the average person a chance to invest in large commercial real estate.  Let’s face the facts.  Most people will never have the chance to invest in large industrial buildings, regional super malls, or downtown high rise offices.  However, the REIT gives everyone those opportunities.  REITs operate commercial real estate in all major US cities and many international cities as well.  Imagine being a part of the action.

Three Reasons to Invest In REITs

The REIT provides three very specific opportunities for real estate investors in addition to getting the opportunity to invest in large commercial real estate without the headache, hustle, or hassle:

1) Performance, 2) Dividends, and 3) Diversification.

Performance. Real estate investors are like NASCAR drivers, only the vehicle’s performance matters.  An investment opportunity doesn’t have to look or be pretty as long as it performs as expected by producing profit margin.

This quirk of the investment community is perfect because the REIT industry is all about performance.  In fact, the REIT industry has outperformed all the major US benchmarking indexes since 1971, including the Dow Jones Industrial Average, the NASDAQ Composite, and the S&P 500.

Bar none, this industry has consistently returned the type of consistent growth that makes investors take notice.  Needless to say, these numbers are impressive when compared to other small- to mid-sized companies.  But if you focus on the last few years since the stock market crash and the recent economic down turn, you will be further impressed.

This graph says it all.  According to Morningstar’s website, the REIT industry has just been off the charts in the last few years.  You can see over the last five years, the industry is up 21.63% and it continues to increase.  Over the last year as most stocks have begun to level off or drop, the REIT industry continues to post astounding numbers.  REITs are up 21.52% during the last year and 9.40% over the last three months.  To put the last year into perspective for you, the technology industry is up 11% during the last year and the home building industry is down 39.97%.

The negative against the REIT industry is critics are wondering can it possibly maintain this level of performance with gains that have been phenomenal year after year.  Many of the experts don’t think it is possible.  However, oftentimes when someone speaks out against this industry, it seems to continue to perform off the charts.  Only time will tell if it can continue.

Dividends. Dividends are payments made by a company to its share holders.  According to the Real Estate Investment Trust Act of 1960, a company must pay 90% of all taxable income to shareholders annually in the form of a dividend to be classified as a REIT.  This is powerful because it creates an additional revenue stream for the investor.  But if you re-invest the dividend, your shares in the REIT will grow as well.

The dividend payouts are a strong reason the investment community is taking notice of REITs.  However let’s not forget that real estate investors are concerned with its performance and  the bottom line.

So, how have the REIT dividends been performing?  Since 1992, REIT dividends have outpaced the Consumer Price Index, CPI.  According to the Bureau of Labor Statistics, the consumer price index program produces monthly data on changes in the price paid by urban consumers for a representative basket of goods and services.  The CPI is the most widely used measure of inflation.

Diversification. Every investor must take measures to protect themselves from catastrophic loss in a particular investment industry, sector, or stock.  Diversification is the answer.

“The goal of diversification is to lower the risk of a portfolio for a given level of return. Because of their declining correlations with other types of investments, REITs offer a significant source of portfolio diversification.” Michael C. Henkel, President, Ibbotson Associates

According to the National Association of Real Estate Investment Trust, REITs offer an attractive risk/reward tradeoff for investors.  In addition, the correlation of REIT returns with other asset classes has declined over the past 30 years.  Finally, REITs may boost return or reduce risk when added to a diversified portfolio.   These are three powerful reasons the REIT makes an excellent choice for diversification in a portfolio.

The REIT industry has been on a terrific run over the past forty years.  This fact was solidified in 2001 when Standard and Poor’s recognized REITs as a legitimate investment opportunity for investors by adding them to their major indexes, including the S&P 500.  This was a great opportunity for REITs to really hit the mainstream.  Finally, their viability as a powerful investment is beginning to be realized.

The question remains, will you do the due diligence required to find out if the real estate investment trust is the right investment vehicle for you?  Don’t take our word for it, you are encouraged to research and/or ask your financial professional for more information and advice on the REIT.  It just may be the investment that could solve your retirement concerns.