Are you familiar with REITs? If not, maybe this is a good time to start thinking of adding them to your portfolio.
REIT (pronounced “REET”) is an acronym for Real Estate Investment Trust. A REIT is a security that sells like a stock but allows you to invest in commercial real estate. REITs can invest directly in properties or they can invest in mortgages. Investing in REITs can be a good way to add Commercial Real Estate to your portfolio without going out and purchasing investment properties.
Pros:
- Real Estate with the liquidity of stocks
- Historical low correlation with overall stock market
- Higher yields
Because REITs are securities that trade like a stock, it allows you to have Commercial Real Estate in your portfolio and still maintain considerable liquidity. Since you do not have to endure the long buy and sell cycles of normal real estate transactions, many investors like this positive. Historically the correlation between REITs and the overall stock market is negative. This means when stocks move up or down, REITs normally move in the opposite direction. This is great for creating a well-diversified portfolio that performs well in both Bull and Bear markets. Another positive trait of REITs is their tax structure. REITs are required to pay out 90% of earnings each year to shareholders in the form of dividends. This rule makes REITs a high yielding investment.
While REITs offer, many positives there are also Cons:
- Fees
- Tax inefficient
REITs typically have higher associated fees than other mutual funds. This is not the case with all REIT funds though. For example, the Vanguard REIT Index fund has an expense ratio of 0.10%. You just have to do your homework to insure you are keeping the expenses low. Since REITs must payout 90% of their earnings in dividends, this makes them tax-inefficient. For people in higher tax brackets, it is wise to hold REITs in tax advantaged accounts such as IRAs or Roth IRAs to avoid this con.
A REIT can be a good addition to a portfolio if added in the right ways and percentages.
Do you plan to add REITs to your portfolio?
###
Author
Isaac is a Fee-Only (no products sold) Certified Financial Planner® Practitioner. Isaac founded Stalwart Financial Planning with offices in Fayetteville NC and Durham NC. Isaac provides comprehensive planning and investment management services to individuals from all walks of life. Isaac can be reached by phone at 910-867-8464, or by email (iallen@StalwartPlanning.com). Visit him at Stawart Financial Planning www.StalwartPlanning.com.