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REIT - Real Estate Investment Trusts

Of the many investment instruments (stocks, bonds, mutual funds, etc.) REITs are the least known. A REIT is a way for an investor to buy real estate, and is a cross between stock and real estate, but instead of securities they hold real estate in their portfolios. Real estate does not typicaly follow stocks (correlation is about 0.4), so it is a good way to diversify your portfolio.

Types or REITS

  • Mortgage (invest in real estate debt)
  • Equity (own actual property)
  • Hybrid (combination of mortgage and property holdings)

Here we are addressing only the equity REIT. This trust is similar to a mutual fund. However instead of owning stock in several companies, it will own several real estate properties. These holdings can be consist of diverse properties and geographic locations. For example trust may have properties in several states and hold a number of different types of properties as follows:

  • Commercial
  • Industrial
  • Residential

Before investing in REITs, examine the advantage and disadvantage of this type of investment to see how it should fit in your portfolio. Also note that these trusts tend to do well during periods of inflation, but poorly during a recession.

Advantages Disadvantages
Professional Management – Historically have done better than stock or mutual fund managers. Susceptible to bad management decisions
Good way to invest in real estate with liquidity No voice in managing the properties
Cash flow is good. Historically 6-7% Virtually no tax breaks
Diversification – diversified properties and location lower risks Not much leverage

Advice on Buying REITs

  • Diversify – own at least 5 trusts
  • Hold – real estate is not for short term investments
  • Watch costs – some trusts have very high commissions
  • Buy trusts that have a good history

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