Real estate is an area that interests a lot of investors because it is low risk and high yield. Plus, it also enables investors to diversify their portfolio. The real estate market is also global, which means people could potential have investments anywhere, from Houston to Tokyo. The downside, however, is that real estate is expensive. But this is where real estate investment trusts (REITs) come in with a very interesting proposition, and one that Al Hartman believes is one that everybody should listen to.
Al Hartman on REITs
What a REIT does is invest in properties, or in mortgages on properties. Over the past decade, they have shown consistent returns of 10.5%, which is very impressive and something to have a lot of faith in. A REIT does not expect someone to bring in a real estate property. Rather, they enable people to purchase shares in their overall organization.
Why REITs Are Appealing
There are a number of key advantages to investing in a REIT, including:
- That they allow for a diversified portfolio that includes real estate, without the high associated cost of owning real estate.
- That it comes with management included. This means that you don’t have to look at a photo of properties to choose one, you don’t have to find tenants or chase rent, you don’t have responsibility for maintenance and repairs, and so on.
- That they offer significant tax advantages, not in the least that double income taxation is avoided by them distributing 90% of their taxable income each year to its investors. Plus, you can treat some of it as return of capital.
- That they protect against inflation, because the majority of income is earned through rent, which rises with inflation.
The Risks of REITs
Although a REIT is generally classed as a low risk but high yield investment opportunity, it does come with some risks, as all investment opportunities do. Some of those risks include:
- Investments are made on properties, and you never know if something happens that devaluate that property.
- Some investments are made on mortgages, and they may not be paid back.
- Prices can fluctuate depending on what the REIT decides to invest in.
How to Choose a REIT
Choosing a REIT has to be down to research. Consider, therefore:
- Their yield and debt. While it may be attractive to go to the highest yielding REIT, if they have high levels of debt, they may not be able to sustain it.
- Their management potential. You have to make sure that they are committed to properly managing the properties – or the mortgages – that are included in the trust, so that they have a greater chance of a high yield.
- Demographic trends. Real estate is always in a state of flux, depending on what society is doing. There may simply be no money in real estate, as was seen during the Great Recession of 2008.