Historically, having a diversified portfolio is a good way to manage risk, and REITs may be a way to diversify some of your assets into passive real estate investments. You don’t have to manage or finance REIT properties, but it’s important to understand all aspects of REITs before investing.
The REIT company owns, finances and/or manages the properties, and you own shares in the company. REITs come in various forms―the key is to find the one that works for your financial plan.
Understanding REIT types. An equity REIT is one in which the REIT company owns and manages properties in its portfolio. A mortgage REIT doesn’t own properties, but rather owns the mortgages on a collection of properties. Hybrid REITs own properties and mortgages. All types must distribute at least 90% of their taxable income to shareholders. REITs are pass-through entities that don’t pay income taxes. Rather, shareholders pay income tax on their REIT earnings.
REITs trade in multiple ways. Publicly traded REITs are listed securities that trade on stock exchanges. Non-traded REITs are not listed on a security exchange and are sold on an illiquid secondary market. Unlisted REITs are also publicly traded but do so through brokers rather than on exchanges. Private REITs are also available. You need to understand the advantages and disadvantages of all types before investing.
REITs focus on different sectors. Most REITs specialize in one real estate sector. These sectors include offices, retail centers, apartment buildings, warehouses, medical facilities, hotels, cell towers, data centers, and infrastructure properties. A few REITs hold multiple property sectors in their portfolios. A REIT’s prospectus or private placement memo contains details on its holdings, finances, and operations, and should be mandatory reading before purchasing shares.
Recently, REIT’s have shown the ability to outperform equities. The MSCI World REIT Index covers large and mid-cap REITs in 23 developed countries. In the last ten years, the index provided an annualized return of 14.64%. That beats the 10-year record of the MSCI World Index of equities, which returned 13.22% annually. Investors can also gain REIT exposure by owning exchange-traded funds that mirror one of the national or international REIT indexes.
REITs can offer potential benefits, but also significant risks. As you can imagine, the 2008 mortgage meltdown was a bad time to own REITs, and they may not be appropriate for all investors. If you’d like to learn more, call or email me for a consultation. Real estate exposure is a classic way to diversify investment portfolios, and I will be happy to show you how they might fit into your wealth accumulation plan.
Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.
Non-Traded REIT’s are linked to the commercial real estate market which can be volatile due to adverse macro-economic changes and their impact on property values, tenant defaults, and occupancy rates among other things.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The MSCI World REIT index and MSCI World Index of Equities are unmanaged indexes which cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.
An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.
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Please note-investing involves risk, and past performance is no guarantee of future results.The publisher is not engaged in rendering legal, accounting, or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax, or legal advice and may not be relied on for the purpose of avoiding any federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.