Real estate prices continue to fall, meaning there are investment opportunities available.
Some banks and consumers are considering real estate investment trusts, or REITs, as a way to buy into the real estate market without a significant risk of going underwater.
What Is an REIT?
An equity REIT is a security that allows investors to own a partial share of real estate they wouldn’t normally be able to afford, such as office buildings, apartment complexes and shopping malls.
Trusts such as SL Green Realty, LLC (Stock Quote: SLG), Vornado Realty Trust (Stock Quote: VNO) or CB Richard Ellis (Stock Quote: CBR) collect rent from their tenants each month, just as any other landlord would. However, unlike a landlord, these trusts are required by law to pass on at least 90% of their taxable income to their shareholders in the form of dividends.
“You’re buying stock in a company that is structured in such a way that the rent is being passed on to you,” says Ron Kuykendall, vice president of communications for the National Association of Real Estate Investment Trusts. “But that stock can go up or down just like any other.”
REITS and the Downturn
REITs, just like almost any other asset, have taken a few hits since the recession began in 2007. According to figures from the FTSE NAREIT U.S. Real Estate Index, the total return for all REITs fell more than 37% from 2007 to 2008. There is still value to be had, however. The average yields on dividends from REITs increased by more than 3 percentage points from 5.29% at the end of 2007 to 8.37% at the end of 2008.
An economic recovery may be many months away but, for some advisors, REITs are a good addition to well-balanced portfolios.
Here are a few helpful hints that you can use to find out whether a REIT is right for your investment plans.
1. Check to see what’s out there. Before you walk into your financial advisor’s office and say, “I want to buy some REITs,” do some research. You can find links to publically traded REITS on the National Association of REITs Web site. While there, you will be able to click on any one of more than 100 REITs listed to find out what the REIT is trading at, how much it earned in the last quarter and how much it paid out in dividends.
Keep in mind that there’s no one-stop shop where you will be able to compare these REITS. You’ll need to click on the investor relations section of each of these Web sites to access their annual reports before you decide how to invest.
2. Look for a growth sector. If you think that shopping malls and office buildings will suffer in this recession, consider putting your money in REITs that specialize in health care or municipal buildings. You can also see the returns for each of these sectors on the National Association of REITs Web site.
3. Talk to your financial advisor. You may be sold on REITs, but it’s always a good idea to discuss any investment opportunity with someone who knows about your investment portfolio.
For example, Baltimore, Md.-based financial planner Michael Kelly has historically put 5% to 6% of his client’s portfolios into REITS. However, he is now allocating as much as 10% to these investments.
“REITs are selling at a discount of 30%,” says Kelly. “They’re beaten down so much that they’re kind of hard to resist.”
If you don’t have a financial advisor already, you can start your search with the National Association of Personal Financial Advisors.
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