Are you looking for an investment that has attributes of an equity and a fixed income? Have you considered a REIT? Right now Real Estate Investment Trusts offer some of the best opportunities in the last few years. While they are currently down as compared to stocks they historically are so that is really not a major concern. But buying opportunities exist in markets like this and now may be the time to look into a well-run REIT. Since 2009 many REITs have had returns in the neighborhood of 200%. And if you go back to the early 1970’s REITs have averaged a 13% return over the last 40 years. So a few bad months or even a bad year will not negate the positives that well managed REITs offer.
Why are REITs still considered a good investment if they are not keeping up with the broader stock market? As I hinted at earlier REITs have a historic cyclical cycle with equities. When equities are up REITs are down and the reverse is also true. But right now REITs are attractive and undervalued because the underlying basics of the REIT is sound. REITs are not cutting their dividends, buildings are not setting empty, rents are stable at the moment and there have been very few credit downgrades in REITs. Technically REITs are sitting pretty as they tend to use short term rates for a basis, issues long term stable bonds and mortgages. The real estate market may not be what is was in 2006 but it has bounced back considerably since the meltdown of 2007-2009.
In recent times REITs did become pricey or maybe even over priced as returns were slashed. In some instances REITs returns were equal to that of the S&P 500 or a ten year Treasury. And tax wise income from a REIT is not treated the same as a dividend from an equity investment. So you need to consider that as well when you are investing in REITs. And historically most REITs adjust their dividends in the first quarter of the calendar year so if you find a good REIT late this year keep an eye on it and consider buying it prior to the announcement of a dividend increase as people have a history of chasing returns and artificially driving up prices at least on a short term basis.
As REITs are a pool of actual real estate they in theory will appreciate in value because as a rule real estate appreciates in value over time. This will be the underlying factor in the price of a REIT going up or down depending on what the values of the property in the REIT do. The dividend is a payment of the profits of these properties after expenses. REITs have to pay out at least 90% of their profits as dividends or they will lose their status as REITs. So well managed REITs that control their expenses and invest in solid properties should see an increase in their underlying value and this should also allow for modest raises in their rents to pass along as dividends. Look for well managed REITs that are trading at a discount or ones that have Net Asset Values under 100% or near that level. Otherwise you will be paying too much for the REIT and you may take a loss but remember REITs are not trades they are long term investments.
