A different property investment approach
As mentioned in several other articles here before, Real Estate Investment Trusts (REITs) offer a nice alternative to property investors who do not want to become landlords or physical property owners themselves. REITs allow property investors great liquidity as opposed to normal property ownership in residential or commercial (retail, office, industrial or warehouse) real estate investing. REITs can also help you in diversification of your investment portfolio. They offer a direct, but smaller corollary to stock indexes, such as the Standard and Poors 500.
Many REITs qualify for federal tax break incentives if they distribute at least ninety percent of their taxable income through dividend offerings. Of late, many REITs have been performing better than ten year Treasury notes, on average. As a class of portfolio investment, REITs have been attracting more and more investors looking to find better returns than the bond market will allow in recent years. So, the growth in REITs (especially niche REITs that specialize in only one type of real estate segment, such as retail malls or office buildings, for example) has been great in the last couple of years especially.
REITs versus bonds
Investors should also understand that increasing yields through acquisition of REIT stocks is not the same as the acquisition of bonds. That’s because bonds as an asset class behave in a far different fashion than REITs. In general, over the last few years, REITs were approximately twenty percent more fluctuating than the Standard and Poors 500. They were about six times as volatile as the bond market in the U.S. too. The major risk factors for REITs include any potential for interest rate increases in the U.S. economy, as well as any slowdown in the current hot real estate market. Any new credit crunch will have another adverse effect on REIT prices. So one has to be wary about the predictions for REITs given the current slowing down in the overall pace of the previously hot real estate market.
Things to consider first
If you’re someone that does not feel they would be temperamentally suited to direct real estate ownership and landlording, whether commercial or residential, then REITs may be an excellent alternative for you. However, keep in mind that investing in a bundle of property stocks, regardless of the REIT niche you purchase in, the greater overall risk you’ll be afforded relative to safer investments such as bonds or Treasury bills. As usual, it’s the old risk-reward trade-off. Be sure to match your personality to your property investing style to make a good match.
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