Predictable Income – Let’s Look at a REIT

This week seems like a good time to reflect back on a post we published on 1/12/14 titled, “Predictable Income in 2014.”

In that post, we referenced income investments such as MLPs, BDCs, and REITs, but only elaborated on MLPs. Let’s explore those options further by elaborating on the benefits of a REIT in your portfolio.

Let’s start with a basic definition of a REIT… A real estate investment trust (REIT) is a company that owns and operates income producing real estate. The easiest way to understand a REIT is to compare it to an investment vehicle that many of us understand – a mutual fund. A REIT holds many different properties in the same way a mutual fund holds many different stocks. One of the biggest reasons a REIT is attractive to an investor is because a REIT offers attractive yields (translation: income).

One of the common questions concerning REIT investing is chosing between the privately traded vs. the publicly traded. We favor publicly traded REITs for a few reasons:

1. Private REITs have made a comeback and are becoming very popular again in the local Phoenix community primarily because real estate has done so well over the last few years (way up off the 2011 low). They are also making a comeback because brokers who sell these private REITs make very large up front commissions… something that has proven to be a big obstacle to overcome for the investor looking for solid long-term, post-fee performance. You can imagine how well the investment has to actually do to overcome a 7% upfront sales load plus ongoing managerial expenses… the investor may have to make as much as 10% just to get back to even.
2. Another drawback of the privately traded REIT is that it is not liquid for at least a certain period of time. Illiquidity is not always a bad thing, especially for those investors with longer time horizons, but anytime you are giving up access to your money… you should be cautious and consider the decision very carefully.

The bottom line is this: Under the right circumstances, a properly selected publicly traded REIT can offer great benefits to the income producing portion of most portfolios.

Here is a great video from Bloomberg where Bob Rice does a segment on REITs. Please let us know if you have any questions or would like to discuss REIT investing further.

Categorized in: Blog

This post was written by Conscient Capital