What looks like a mutual fund, pays dividends like a mutual fund, is compared to a mutual fund and most recently, up against the S&P 500 index, actually has performed better, yet isn’t one? REITs, which stands for real estate investment trust is often confused by investors as a mutual fund. As as to the performance comparison, it was actually a sector of the REIT world, the commercial REITs that outperformed the S&P 500 in a year-to-date comparison (REITs, as of 08.26 were up 11.7% while the index of large cap stocks posted a 4.9% loss).
Before we get ahead of those who aren’t quite sure of what REITs are, let’s take a moment and break down. REITs fall into five basic categories. Retail REITs focus on malls and free standing retail operations. Residential REITs invest in multi-family dwellings such as apartment buildings. Healthcare REITs are involved with the hospital, healthcare facilities and retirement home operations. Office REITs are also self-explanatory while mortgage REITs, suggest that the REIT actually owns homes. Instead the own mortgage backed securities.
When you buy a REIT, you are buying a stock in a trust that focuses their assets on the profitable purchase of real estate. Aside from mortgage REITs, most of these trusts look at the need for buildings to house businesses or numerous families. These trusts invest in these properties acting as a company rather than a fund holding numerous underlying securities. because they are essentially a stock in that respect, investors should be aware of their record of good profits, strong balance sheets and as little debt as possible, especially the short-term kind.
There is no shortage of buying opportunities for well-positioned companies. This doesn’t mean it is the next big thing and no analysts suggests more than 5% of your overall holdings should be focused here. But it does provide for some intriguing diversification.
The bet with REITs is that there are still numerous properties that could face financing problems and with almost a billion dollars in refinancing obligations set to expire in the coming month, those who have been keeping their cash on hand may se a lot of low-cost opportunities. The second bet here is that the economy will eventually recover.
REITs that own apartments have found their businesses to remain robust as people continue to sit on the sidelines despite lower mortgage rates and depressed housing prices. Well financed healthcare REITs have been focused on consolidation and look to be invested consistent with projections of need in the future.
REITs aren’t real estate. They are companies that buy real estate and you are an investment partner.
Here are several articles concerning REITs from Bloomberg, David Shulman, a Distinguished Visiting Professor at Baruch College and former Lehman Brothers Managing Director and Head REIT analyst, REIT.com, and Janet Morrissey writing for Time
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This is all good information to help me understand REITs better. The one thing I’m still confused on is you mention you buy stock in a trust. This is still a description for buying a private REIT like a Cole REIT compared to a public REIT like a Simon right? I guess reading the word stock made me think of public REITs more than private ones and I just wanted to clarify that because private REITs can be good investments too.
@ Marie – you are right, a Cole REIT is still private even though it says to buy stock in a trust. I know it’s a bit confusing, but yes Cole REITs are not traded like Simon ones.