Why is REITs a good idea?

Why is REITs a good idea?


REITs a much better Investment For You

Readers, if you have the real property investment bug, try investing in public REITs or (for that more single family residentially-minded) public homebuilders. The reasons for doing this far outweigh the few added costs. Real Estate Investment Trusts or REITs offer a great alternative to buying individual assets, they buy, manage and sell property. Public home builders typically buy large tracts of entitled property and build and sell single family homes.

Why REITs Buying may be beneficial and Better than Buying an Office or Apartment Building

Liquidity –

The first reason is simple, liquidity. This is something that’s dangerously overlooked by individual real estate investors (and during my job, I buy from those sellers). If you have plunged a significant amount of your money in to a real estate asset and you then need to have it, you are in trouble. Liquidating real estate is the slow, costly and difficult process. I understand that selling a home right now seems simple – but selling an office building or apartment building can be hugely difficult. Also, your ‘need for speed’ will translate in to some lower price for your asset. Public REITs obviously don’t possess that problem, your shares are always liquid and your need to sell will not affect the price. [Unless of course you are trying to place hundreds of millions of dollars – in which case you should probably call me and we should date or at least party together.] Never underestimate the value of liquidity.

Diversity –

Because REITs are large, they typically own many various buildings, rather than just one. If you’ve read Seneca’s post on diversification, then you can skip to the next section. When you and your brother scrape together money to purchase a single real estate asset, you are taking on a large, undiversified risk. If that building has a tree fall onto it, catches fire or even just has a couple of plumbing burst, you are in a tricky situation. You have taken on a lot of building specific risk. By investing in a REIT you obtain the value of their diversification. If one of Sam Zell’s structures catches fire, it is ok. Sam (chairman of Collateral Office Properties – EOP) owns 699 others that most likely haven’t caught fire. He has spread his risk over much more buildings. Small real estate investors don’t have this luxury.

Expert Management –

I know that it seems easy to operate a building. You rent it out, collect the rent and spend the cash. But it isn’t that simple. I am a landlord for a real estate investment company and it takes time to keep a building leased and operating. To run a creating well takes expertise, experience, software, good contacts (among companies, plumbers, lock smiths, brokers… )#) and lots of time. When you buy a REIT you get the advantage of their professional management. The slight drawback is that you pay it off. But unless you are planning to quit your day job to operate your property, you too will be paying for management. Furthermore, because REITs typically have large portfolios, they can run the buildings more proficiently. They can buy supplies in bulk and cut better handles service providers. Try negotiating your leasing commission with a broker when you have one building – then imagine how much easier it might be if you owned 40 buildings.

REITs

Virtually Guaranteed Cash Flow –

REITs pay dividends (it is part of their business structure, they are obligated to pay out 90% of their own taxable income to shareholders. )#) If you own your own building there will be times when you are funding capital needs and sitting along with vacant units or suites. But REITs will pay you each and every quarter. Of course there have been situations where REITs have cut or suspended their dividends – however in general the cash flow from owning REITs is predictable. And yields at this time are higher than one would expect. – as an instance, EOP is yielding 6% (as of the date of the printing).

The Drawbacks –

There is one large drawback to purchasing REITs, you cannot use your 1031 funds without first having to pay your capital gains. But with capital gains taxes at reduced levels, and the froth in the real estate market therefore high, this would be a great time to pay those taxation’s and move your money in to something a little less dependent by yourself skill and know how. The second drawback is that you cannot make the most of your own local knowledge. If you have better information compared to market about a specific asset, then you should think about purchasing that asset rather than buying a REIT. But be hesitant – often, like with hot stock tips, one usually isn’t as smart as you thinks. Fees and overhead are also drawbacks. REITs have to pay for great sums of money to accountants and lawyers to publish their results every quarter and adhere to federal regulations. Additionally, they have to pay their brass large salaries to maintain them interested and motivated (see my fly away post). And also, they have the disadvantage of having to reveal to their competitors their pricing and strategy – such may be the plight of public companies.

Homebuilders –

Many of the arguments above hold true for that homebuilders as well. The one difference is that homebuilders aren’t structured as REITs and thus are not obligated to toss off cash. However they typically do offer dividends. They nevertheless offer liquidity, diversification and professional management.

In closing, when you are considering an investment in real estate, be realistic about your aggressive strengths and weaknesses. Be realistic about the time, energy and skill it requires to run a building efficiently. Have some foresight about your personal cash needs and what would happen if you or your loved ones had a sudden need for cash. REITs and public equities offer a great alternative to buying your own buildings. Give them a appear.

3 Reasons to Add REITs to Your Portfolio

Concerns about the potential impact of higher interest rates have sent investment trusts on a roller coaster ride this year, after chalking upward double-digit gains in 2014. Despite their recent fickle behavior, nevertheless, experts say this asset class belongs in the diversified portfolios associated with long-term investors. What’s more, the volatility could provide a purchasing opportunity.

A REIT is simply a company that owns or finances income-producing property. Most REITs are traded on major stock exchanges, and investors can buy a share of the REIT just as they would every other stock. One major draw of REITs is that they provide investors having a regular income stream, as they typically pay out their taxable earnings as dividends to shareholders.

In the low interest-rate environment that has prevailed recently, income investors have turned to REITs to generate potentially greater rates of return than more traditional income-generating investments, such because Treasury bills or certificates of deposit. In 2014, the FTSE NAREIT Just about all Equity REITs Index gained an eye-popping 28 percent. But to date this year through May 28, the index is down 0. thirty-two percent, erasing an 8. 8 percent gain in January.

“REITs are about the only game in town if you are searching for strong yield, ” says Brad Case, senior vice president at the National Association of Investment Trusts, an industry association group. Even compared with stocks, the actual dividend yield for equity REITs is favorable at 3. sixty one percent, versus a 2 percent dividend yield on the Regular & Poor’s 500 index through April 30.

This spring, REIT shares sold off amid concerns over whether a rise in interest rates will hurt REIT prices, Case says, adding it’s a common misconception that REITs perform like bonds. Real estate is really a separate asset class from stocks and bonds, and investing in REITs offers a chance to diversify your portfolio with exposure to the real estate field.

Here are three reasons to consider adding REITs to your own portfolio.

REITs typically perform well when interest rates are rising. “With bonds, when interest rates go up, bond values drop. But for REITs, when interest rates go up because the actual economy is strengthening, you have higher rent growth and greater occupancy rates, which means higher income from buying real property, ” Case says.

Looking back over the previous 16 periods of rising rates of interest, Case notes that REIT returns were “positive in 12 of these periods and strongly positive in nine of 12. ” He highlights the June 2005-June 2006 period like a time when interest rates were rising in response to an increasing economy. From June 2, 2005, to June 26, 2006, 10-year Treasury produces climbed from 3. 89 percent to 5. 25 percent, whilst REITs gained 20. 7 percent during that period.

REITs enhance a well-diversified portfolio. “Long-term investors seeking to construct and maintain a well-diversified portfolio should purchase REITs to gain exposure to an important asset class that’s otherwise difficult to access, ” says Michael Knott, managing overseer of Green Street Advisors, a Newport Beach, California, real property research and advisory firm. “REITs are the best way to achieve real estate-like returns and the advantages of diversification to one’s portfolio. ”

For investors who don’t have contact with real estate, now may be a good time to think about adding an allocation, Knott says. He recommends a target of 5 percent to 15 percent for many investors.

“Despite the recent volatility, REIT valuations are more attractive than earlier within the year, ” wrote Mark Litzerman, co-head of real estate strategy at Wells Fargo Investment Institute inside a May research report. “Investors may want to consider taking advantage of potential opportunities to increase underweighted portfolios. ”

REITs follow a different business cycle. Property moves in a different cycle than other industries, and the present cycle for real estate shows there is still some room to operate. “Because of the long amount of time it takes to construct and lease out commercial properties, the commercial real estate cycle is approximately 18 years from trough to peak – about four times so long as the general business cycle. We’re currently nine years into the present cycle. So, it’s still middle innings for real estate traders, ” Case says.

For stock investors, these picks stem through Green Street Advisors’ three favorite property types for long-term traders: malls, apartments and self-storage. Each of these property sectors includes a strong track record and a relatively low capital expenditure load, Knott says.

Taubman (symbol: TCO)- This REIT includes a proven record in the mall business, along with a management team led with a founding family with a large stake and a long-term eyesight, Knott says. He calls it a “high-quality portfolio that currently trades in a meaningful 25 percent discount to the value of its property. ” The stock, which recently traded at $75, has exchanged between $71. 43 and $85. 26 over the past fifty two weeks.

Equity Residential (EQR)- This is a best-in-class apartment operator that owns a high-quality portfolio located in coastal markets that needs to be longer-term winners, Knott says. The company has a strong background and trades below the value of its real estate, he or she adds. The stock, which recently traded at $75, has a 52-week selection of $60. 44 to $82. 53.

Public Storage (PSA)- This REIT may be the leading player in a strong but unsexy niche. Self-storage is very attractive to investors due to the impressive growth and low capital expenditure requirements, Knott explains. “The management has delivered impressive long-term returns without taking lots of risk, and the company is more attractively valued than it’s closest competitor, Extra Space, which is also an immensely gifted company. Self-storage trades at premiums to the private value from the real estate, but that’s because the private market values the company too cheaply. The public market is much closer to correct, but even then, is not bullish enough, ” Knott states. The stock has a 52-week range of $162. 34 in order to $206. 92 and recently traded at $196.

Exchange-traded funds. Investors who don’t wish to pick individual stocks may consider REIT exchange-traded funds. REIT ETFs own baskets of REIT stocks and try to mirror an underlying REIT index.

The iShares U. S. Property ETF (IYR) was the first REIT ETF, also it began trading in 2000. Now there are more than 20 REIT ETFs to think about. Vanguard REIT ETF (VNQ) is the largest REIT exchange-traded account, according to Morningstar, a Chicago-based independent research firm. VNQ includes a low expense ratio at 0. 10 percent, which makes it among the cheaper REIT ETFs for investors looking for exposure to the actual estate sector.

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