ó The average investor isnít going to buy into a
shopping mall or an apartment building. But investing in
real estate can be a useful way to diversify a
why, especially when interest rates are low,
fixed-income investors looking for alternative
investments to maintain sufficient yield are giving more
attention to real estate investment trusts.
estate investment trusts, also called REITs, allow
investors to passively invest in real estate without
directly owning property.
are a hybrid because they trade like stocks, but they
are different from stocks of regular companies because
they invest in income-producing real estate, such as
apartment buildings, hotels, office buildings, hospitals
and shopping centers.
are currently 14 such trusts featured in the Standard
& Poorís 500 stock market index.
they occupy a relatively small niche in the financial
sector, the market share is growing. REIT Magazine
reported in April that mergers and acquisitions of such
trusts are on the rise. There were $17.4 billion in
merger and acquisitions deals in 2014; $43.8 billion in
2015; and $50.6 billion in 2016.
investors who choose to add REIT funds to their
portfolio must remain cautious," said Thomas Walsh,
a portfolio manager with Palisades Hudson Financial
Group in Atlanta. "While REIT funds offer good
yield, like all other equities, they are volatile.
because REITs donít typically move with the stock
market, itís one way to increase yield without
increasing risk. Itís a way to diversify," he
recommends investors limit such investments to 7.5
percent to 10 percent of their equity allocation.
of the big advantages of investing in real estate
investment trusts is they must pay out at least 90
percent of income to investors.
Davis, president of the Davis, Davis & Associates
accounting firm in Pittsburgh, said the distributions
are taxable. That is not a problem for investors who
have such holdings in their retirement plans because
that income is deferred until the investor begins taking
distributions at retirement age.
lot of times, a REIT investment is better off in a
retirement plan," Davis said. "But if you are
paying taxes on REIT income, you have to consider that
the value of the REIT itself fluctuates. If the REIT is
not doing well, you could be paying taxes on an
investment where the principle might be down."
Greenfeld, chief investments officer for Waldron Private
Wealth, said his Pittsburgh-area firmís exposure to
such trusts increases or decreases as market conditions
and valuations change. He doesnít believe itís a
good idea to invest in the trusts in order to chase
do think REITs have a long-term growth perspective on
top of the income payouts," Greenfeld said.
"If interest rates are rising for the right reasons
ó such as a strengthening economy, declining
unemployment or payroll increases ó then REITs can
in the short run there could be volatility from rising
rates, if these other characteristics exist, then REITs
can pass on rent increases, which helps valuations and
to the Washington, D.C.-based website, REIT.com, which
analyzes the macro- and micro-economic fundamentals
impacting the REIT and commercial real estate industry,
operating fundamentals are strong across nearly all
property types and geographic markets.
markets continue to enjoy strong renter demand,
especially in coastal markets. Office buildings owned by
real estate investment trusts are finding steady tenant
however, reported weakness in store traffic including
bankruptcies in light of the broader challenge of
e-commerce, according to REIT.com.
STORY CAN END HERE)
at Signature Financial Planning in Pittsburgh use all
types of REITs in their client portfolios, which include
publicly traded ones as well as non-traded versions. The
non-traded ones are securities not listed on any
exchange, but sold through brokers and financial
are the best and simplest way for average investors to
gain access to meaningful real estate investments,"
said Aaron Leaman, chief financial officer at Signature
investors should keep in mind that the trusts are
riskier than bonds, and when it comes to non-traded
REITs, they can be illiquid and carry expensive
management fees. The trusts also are subject to the
whims of the real estate market.
you invested in REITs in 2006 and 2007, you had a
horrible time when the real estate market crashed,"
if you invested in 2009 and 2010, you made a ton of
money because you got in at the bottom of the market.
REITs can be very volatile."