Real Estate Ownership Through Real Estate Investment Trusts (REITs)

REITs provide a way for average investors to be owners of commercial properties.

Businessman looking at a modern building
Understanding REITs. Getty Images/Pinopic

Equity real estate investment trust investors can own commercial real estate without the hassles of managing it. REITs, through experienced management teams, purchase and manage commercial real estate. When you purchase shares in a REIT, you become a partial owner of those properties. From this perspective, you're also a partial owner of an operating business that manages properties for profit. REITs are modeled after mutual funds, and are traded major stock exchanges; some REITs are privately held.

REITs include a wide range of properties which include, but are not limited to, shopping malls, hotels, manufacturing facilities and student housing on major college campuses. They typically hire the best management teams. The team’s job is to manage the properties to maximize rental income and profits. Equity REITs are not taxed at the corporate level.

Property Management Without Headaches

REITs allow the average investor to own commercial real estate. The investor also enjoys the benefits of having experienced property managers work to make money for them without the headaches of average landlords. A carefully selected management team handles marketing, rent collection, tenant management and facilities maintenance. All REIT investors must do is collect their dividends.

Returns Through Dividends

With equity stocks, management decides whether to pay dividends or reinvest profits back into the company.

REITs, on the other hand, disburse 90 percent or more of the profits to investors. Investors can then decide what to do with their dividends. If investors choose to reinvest, they simply purchase more shares. If they'd rather use their dividends for a vacation, they can do that also. Dividends are normally steady; REITs provide an opportunity increased dividends as rents increase.

Appreciation can also be realized through the increased value of the properties in the trust.

Returns Through Appreciation

Though you won't experience the magnitude of price rises of equity stocks in a good market, REITs have historically performed well due to the steady long-term appreciation of commercial real estate. Short-term fluctuations in inflation and interest rates do not normally impact commercial real estate and REIT share prices as much as they do equity stocks. Bond investments can provide reasonable returns with acceptable risk, but most bond classes have fixed values with no opportunity for appreciation.

Low Volatility and Low Correlation

REIT share prices enjoy lower volatility than equity stocks. This is because rental income and management expenses are predictable over the short and long term. Analysts can predict the performance of REITs more easily than they can that of equity stocks because rental income is usually very predictable. Analysts can be very accurate in their predictions for the performance of REITs.

This reduces share price volatility.

REITs also have a low correlation to the performance of other asset classes. This means that they do not normally act the same as equity stocks or bonds. Because their share prices perform with low correlation to equity stocks and other investment classes, they are useful for portfolio diversification. When stock prices are down, REITs typically perform better, thus balancing the performance of your portfolio.

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