Investing in REITs (Real Estate Investment Trusts)
The investment world is littered with complex, unreliable instruments that are designed more to take the investor’s money than to make them money. There are also high-risk ventures which can lead to either massive rewards or total losses. On the other hand, some investments are helpful for the investors. These investments allow them to tap into wealth areas they would not otherwise be able to access. Real estate investment trusts (REITs) are an example of one of these investment vehicles. REITs allow investors to get into the world of real estate without the hassle of house flipping or property management.
Why Invest In A Real Estate Investment Trust
REIT investing is often done according to the principles of a diversified portfolio. The principle of diversification is that investors should put their money into a wide variety of different asset classes. They can take advantage of many types of assets that generate wealth, and have a hedge in case one type of asset loses a considerable amount of wealth over time. While stocks and bonds definitely represents some forms of wealth, real estate is another.
Billions of dollars are made every year from real estate transactions and the payments of rent by ordinary people. Buildings have real value as well as speculative value connected to their location, tenants, and other amenities. Real estate investment trusts represent a good opportunity to tap into that wealth.
Most people are kept out of the real estate business because of time and capital constraints. They do not have the money to buy a new property or an old property, and they do not have the time to manage those properties. Real estate investment trusts allow the average investor to take advantage of the wealth in real estate without having to worry about these other assorted time and financial commitments.
What REITs to Invest In
There are many different approaches to investing in REITs, just as there are many different types of real estate. Some real estate investment trusts focus on investing in buildings that are rented out to different clients. There are residential and commercial trusts, the former focusing on families and single people while the latter focuses on business.
Other trusts focus on the ability to speculate on properties, including short sales and houses that are flipped quickly for a profit. When it comes to investing in REITs, the smartest bet would be to lean towards trusts that center on residential real estate.
Any trust that looks at speculation or house flipping will be wildly volatile and has possibility of collapsing entirely. Risk is just too great for the average investor to be considerably interested. Commercial real estate is much more stable, but the performance of commercial real estate does not fulfill the diversification requirements that lead investor real estate investment trusts in the first place.
If the economy is going up in general, businesses will be successful and commercial real estate will increase in value. But stocks and bonds, which are another important part of most people’s investment portfolios, will also go up.
Therefore, a diversified portfolio will lean towards those approaches to investing that are going to stay stable when traditional forms of investment our weekend. Residential real estate will not move in the exact same way as stock price as well. This makes the residential approach to real estate more palatable for the individual investor.
How Much Are REITs Worth?
Investing in REITs brings in millions of dollars to individuals and investment firms every year. Most diversified portfolios usually have between 10% and 20% of their allotment in this form of investment. Some leading REITs can be worth a considerable amount of money. For example, the ARMOUR Residential REIT has a market capitalization of over $1 billion and a share price of over $20.
While the ARMOUR REIT has not fared well over the past five years, other REIT investment strategies have proven more successful. The Vanguard REIT index fund has increased in value by almost 50% in the past five years. Vanguard is one of the world’s largest investment companies, and its offering of REITs helps point to the lucrative potential of this investment.
How To Invest in REITs
Investing in REITs can be a simple process. Almost all financial brokers have a certain number of trusts that they manage. These trusts are managed like other stocks. Thus, you can buy them as part of a mutual fund or an index fund. There are also exchange-traded funds with a focus on real estate.
The exchange-traded fund does not have any of the associated overhead costs and management fees that are usually associated with other mutual funds. A real estate investment trust can be part of any investment conversation with a broker. These brokers can help users navigate the forms of real estate investments that a person is comfortable with, and the mix often includes the REIT.
Are REITs a Good Investment?
Here are some of the pros and cons for investing in REITs.
REITs are offered by reputable companies with a proven track record of success. The investment is not a gimmick. It does not defy the forces of the market, since it often rises but sometimes falls.
REITs are also often part of a company’s investment portfolio. Thus, brokers and financial planners can include them in a comprehensive financial package.
The ease of use, reliability, and ubiquitous nature of investing in REITs make this approach just as safe of an investment as a mutual fund.
The biggest disadvantage of REITs is that they only imperfectly track the market for real estate.
REITs involve payments to multiple brokerage companies and fees for investment, holding, and calculations. It is difficult to fully ascertain the extent of these fees, since the REIT holds a series of assets that the fund managers picked.
Some REITs are also dragged down by governmental and environmental risks. For instance, an REIT that has assets in southwest Florida may be dragged down by zoning problems and weather events that have prevented that market from rebounding in recent years.
REITs are now an established part of the investing world. They are offered by many of the leading investment companies, and are tracked on all the major stock exchanges. Investors should look at their needs and the current position of their portfolio before making any investment purchase, of course. But if they desire an opportunity to easily diversify their portfolio and take advantage of the billions of dollars of real estate wealth in this country, they should give REITs a try today.