Investing in REIT’s (Real Estate Investment Trusts)

by Scott Sery on September 27, 2012

A diversified portfolio is one that will be better suited to weather financial storms.  Most people make sure to include some stocks and bonds.  Those who are a little better will include small cap, mid cap, large cap and international funds.  Something that many people leave out of their investment portfolio is real estate.  This is not owning physical property and collecting rent on it.  Nor is it owning your own home, those are completely separate parts of your financial strategy.  Investing in real estate often includes Real Estate Investment Trusts (REIT’s) and mutual funds that hold them.

A REIT is a way for a corporation that invests in real estate to get some special tax breaks.  These are companies that own a lot of land, like a rental agency, and make a profit collecting rent or buying, fixing, and selling.  In order to qualify for REIT status they must distribute 90% of their profits back to the shareholders.  The designation will allow the company to lower their tax obligation.  What is important to know is that not all real estate companies are designated as REIT’s.

Mutual funds are the most common way for individuals to invest.  Just like all mutual funds REIT funds or other real estate funds are made up a variety of stocks and bonds issued from various companies.  They are property management companies, land developers, real estate companies, and many others that make their money based on buying, selling, or renting the land.  Most of the time the companies are designated as REIT’s because that is what will help them make the most of their companies and pay as little as possible in taxes.

REIT’s themselves are confusing.  The whole process to become one is cumbersome, and most people have no idea how it even works.  That is not important to the investor.  Investing in REIT’s has been made easy with mutual funds and ETF’s.  Instead of needing to understand how each company and every REIT works, the investor just needs to trust a fund company, and put their money in that mutual fund.  In order to encourage people to invest in their mutual funds, many will simply call them Real Estate Funds.  People know and understand what real estate is, and even though the funds are technically REIT funds, it is easier to call them real estate funds.

Despite what you call them, REIT’s make up an important part of a person’s portfolio.  Real estate will behave differently than the rest of the market, so while everything else may be floundering, real estate can be exploding.  Likewise, it can take a huge hit, as seen with the housing market a few years ago.  Since it is a volatile piece of a portfolio, most experts recommend that it make up less than 10% of the portfolio.  Somewhere between 5 and 8% is common.  If your portfolio does not have any real estate in it, you might want to look at diversifying a little more.

Do any of you invest in REIT’s?

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Scott Sery

Scott Sery is a native to Billings, Montana. Within an hour in nearly any direction he can be found fishing, hunting, backpacking, caving, and rock or ice climbing. With an extensive knowledge of the finance and insurance world, Scott loves to write personal finance articles. When not talking money, he enjoys passing on his knowledge of the back country, or how to live sustainably. You can learn more about Scott on his website ScottSery.com
  • holly

    I have heard of these- not sure what I think. We own rental properties so this is right up our alley….yet, I’m not sure how I feel about REITs in general. Maybe I just like owning real estate individually.

    • http://www.onesmartdollar.com/ Sean @ One Smart Dollar

      They are a little bit more complicated of an investment. My parents owned quite a few shares in General Growth Properties and sold out before they had a lot of issues a few years ago. GGP REIT that owns a lot of shopping malls across the US.

  • John S @ Frugal Rules

    I have held REIT’s in the past and probably will again in the near future. You’re right in that they can bring a great source of diversification to one’s portfolio…not to mention the possible dividends they can return.

  • http://Www.Plantingourpennies.Com/ Mrs PoP @ PlantingOurPennies

    We like owning actual deeds rather than REITs – I think REITs can be really risky as you might not really understand the nature of the real estate markets that your REIT is actually in. What do you think about some of the REITs now that are buying up foreclosed properties to rent out?

  • http://www.onesmartdollar.com/ Sean @ One Smart Dollar

    I think REIT’s are ready to breakout. You are completely right though and there is a lot of risk involved, but I think every portfolio should have them included, because there can be use upside as well.

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  • MakintheBacon$

    Reading this article has put more confidence in me wanting to dip into REITs.I have been wanting to diversify my portfolio for quite some time. My portfolio currently consists of a growth balanced fund for my retirement, a monthly income fund for my emergency fund and stocks in the financial sector and railway.

    Canada’s biggest real estate investment trust is Rio-Can. I hope to purchase a few of their units in the near future.

    • http://www.onesmartdollar.com/ Sean @ One Smart Dollar

      I think you should do it. REIT are a great way to diversify your portfolio.

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