Business matters: Should I consider real estate investment trusts?
Q: I went to a fun holiday party where a very good friend was talking about her real estate investment trusts. Should I include REITs in my investment portfolios?
A: REITs are an easy way to participate in real estate ownership without buying, managing or selling property.
These investment vehicles have been around since the 1960s. There are three classifications of REITs: publicly traded, public non-traded and private. All REITs have expenses and fees, and they also have risk.
Both publicly traded REITs and public non-traded REITs are regulated by the SEC. There is a warning on the FINRA website that says: “REIT fraud is real. Sales tactics might include using false information, overpromising returns and underplaying risks, and promoting REIT-like products that are, in fact, not REITs and have less liquidity and additional areas of risk. Carefully read all supporting material and consider seeking input from an investment professional before making this type of investment.”
Publicly traded REIT shares are the most liquid and transparent. They are usually traded on an exchange, and their value is available at the end of the day, like stocks and mutual funds. Their values fluctuate, and shares are usually held in custodial accounts (like Schwab and Fidelity) or with fund families like Vanguard and Invesco. Publicly traded REITs are more liquid than public non-traded REITs.
Publicly traded equity REITs own and operate real estate properties. Most REITs focus on a specific type, including offices, apartment buildings, timberland, data centers, cell towers, infrastructure, warehouses, retail centers, medical facilities and hotels. They may also hold a combination of multiple types of properties.
Public non-traded REITS are not bought and sold on a national exchange. Some have specific redemption dates and often calculate the value of holdings periodically when they are going to redeem shares. Recently the $70 billion Blackstone Real Estate Income Trust Inc. and the $14.6 billion Starwood Real Estate Income Trust Inc. announced limits on share redemptions.
REITs professionally manage properties as a business with the goal of maximizing shareholder value. Properties are marketed to attract tenants and earn rental income. It’s easy for an average investor to hold real estate assets in this structured and liquid environment where properties are professionally managed, as well as bought and sold, throughout long-term real estate cycles.
REITs are required by law and IRS regulations to pay out 90% of profits as taxable dividends to shareholders. Unlike stock funds and exchange-traded funds where gains are taxed at the favorable long-term capital gains rates, REITs usually pay dividends that are taxed as ordinary income. REIT dividends are exempt from being classified as qualified dividends. It’s best to hold REITs in tax-deferred accounts like IRAs.
Investors in private REITs are usually pension plans, institutions or qualified investors. These private REITS are often not liquid. The definition of a qualified or accredited investor is any individual with a net worth over $1 million (excluding primary residence) plus income over $200,000.
Over the long term, REITs have delivered similar total returns as stock funds because of high, steady dividend income and long-term capital appreciation. The two asset classes have comparatively low correlation, making REITs an excellent portfolio diversifier that may help to reduce overall portfolio volatility. During certain cycles, they might also increase returns.
Risks are higher with concentrated positions of any asset type. Review all holdings and create a net worth statement. As a percentage of assets, how much do you already own in real estate? Don’t forget to include the beach house, mountain home and New York City apartment!
Changes to interest rates, property values and the economy affect the returns of REIT investments. As with any investment, it pays to do your research since each REIT is different.
Cycles exist in all markets and can last from weeks to years. REITs are not short-term investments; always review your time horizon and cash needs before investing. Review your tax plan to determine which account is most appropriate for taxable dividends. All factors should be considered before deciding whether a REIT will serve your well-balanced portfolios and investment plan.
Mary Baldwin, CFP®, is a fee-only financial planner at Buckingham Strategic Wealth in Indian Harbour Beach. Contact her at 321-428-4555 or mbaldwin@buckinghamgroup.com. For informational and educational purposes only. Individuals should speak with a qualified financial professional based on their own circumstances to determine if the above is appropriate. The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth®
This article originally appeared on Florida Today: Study up: There's much to consider with real estate investment trusts
