REIT: A Painless Way to Invest in Real Estate

The REIT, or to be specific, the Real Estate Investment Trust is a security that trades like a stock in much the same way as a mutual fund. The basis of the REIT’s value is one of the following:

  • A Equity Real Estate Investment Trust: Owned real estate, deriving profits from rent/lease payments

  • Mortgage Real Estate Investment Trust: Real estate mortgages deriving profits from interest payments

  • Hybrid Real Estate Investment Trust: A combination of the both

Other specialized Real Estate Investment Trusts exist as well such as Apartment Real Estate Investment Trusts, Multi-Family Real Estate Investment Trusts, etc. They all fit into one of the main three categories, the names are just more specific with regard to their holdings.

The Real Estate Investment Trust is an indirect means of investing in real estate which does not require enormous capital investment. In short, it puts various types of real property investment within the grasp of the average investor.

REIT’s are very popular among investors now and some are paying very attractive dividends. Given the recent history of real estate investment, on a personal level, I would be somewhat wary.

I find it interesting that this investment vehicle is being adopted in several countries in Southeast Asia. Real Estate Investment Trusts have recently been authorized  by the governments of the Philippines, Singapore, and India.

Here at home, Real Estate Investment Trusts have been busy re-branding themselves. So far this year, four Real Estate Investment Trusts have changed names, logos, and ticker symbols. This appears to be an effort to align the name with the core business and shed names that may have a negative connotation.

Of the 183 publicly traded US Real Estate Investment Trusts, 83 are equity REITs that own and most often manage commercial real estate and derive most of their revenue and income from rents.

You have five reasons to consider an investment in Real Estate Investment Trusts, and I’ll give you a short rationale for each.

Real Estate Investment Trust

  1. Portfolio diversification

Investors understand the importance of a diversified portfolio of investments. Spreading your risk over multiple investments reduces your risk. For example, if you had all your money invested in oil stock and someone discovered the secret of cold fusion, chances are the stock would be worthless in a matter of days. The REIT allows you to make a substantially smaller investment than would be necessary to acquire a property, while giving you the most significant benefit of real estate ownership … appreciation of value. You get all this, plus the ability to diversify into real estate with none of the hassles you would encounter in a conventional real estate transaction.

  1. Liquidity (in an otherwise illiquid asset)

Many investors avoid assets that cannot be readily converted cash. Assets readily converted to cash are considered “liquid.” Although real estate may be a wonderful investment in many regards, it does not meet the liquidity test. However, if your investment in real estate is through a REIT, you enjoy the same liquidity as you would have with a stock.

  1. Performance

In the past 10 years, REITs have outperformed the broad equity market by more than 100 basis points.

  1. Dividends

As a matter of law, U.S. Real Estate Investment Trusts are required to pay out at least 90 percent of taxable income to their shareholders in the form of dividends. REIT dividend growth since 1992 has exceeded the consumer price index (CSI) in every subsequent year with the exception of 2002, which may suggest it is a good hedge against inflation.

  1. Governance

REITs have been recognized by RiskMetrics Group as having among the best corporate governance in the stock market.

The Risks

Understand that REITs are a de facto investment in real estate. A REIT will be impacted by any volatility in the real estate market, positive or negative. The value of your investment may also be affected by changes in borrowing costs. A REIT is no better than its underlying investments, so it is important to do your due diligence and research its business, its assets, and the experience and competence of its management.

If you are interested in learning about REIT mutual funds, I hope you’ll let us know in your comments. Do you have something to add about REITs? Let us know!