Real Estate Investment Trust (REIT) is an investment vehicle that provides real estate holdings. It resembles mutual fund investments with a diversified investment array; moreover, it has some tax advantages. In asset management, REITs can provide diversification for a portfolio.
Because of the unique nature of REITs, a fund that invests in real estate holdings can provide a good way to hedge the stock and bond markets. If you remember right after the late 1990s internet tech boom, the market underwent a major correction. The stock market went down considerably and worried investors because of the stock market volatility. As capital pulled away from the market, more investors were looking for other types of investments including real estate.
Real estate subsequently surged because of low interest rates and interest in new forms of investments. As popularity in housing rose, the medium price per home surged as well. With dropping stock prices, real estate became the safe haven that concerned investors were looking for.
REITs could be a great investment option for asset management purposes. It not only provides diversity, but it provides consistent returns. In fact, REITs have provided roughly an average annualized return of 12.6% (12.6% return on average every year) in the past 30 years. A popular benchmark, the S&P 500, has returned 12.2% over the same time frame. Even with the slight advantage over the S&P, the .4% difference can provide cumulative returns over the long run.
REITs also have tax advantages. Since 90% of the profits are returned directly to the investors, double taxation is avoided. Typical corporate profits are taxed twice since the taxes are first taxed on the corporate level and then with the individual shareholder.
REITs also have the flexibility of stock funds. Under the proper portfolio management, they can provide liquidity by being able to sell their holdings without any restrictions. This allows the managers to be able to invest in other real estate that might be hot at the moment.
These trusts can even be diversified among various geographic locations and real estate types like corporate offices and homes. For only a few thousands dollar as the minimum investment, an investor can take advantage of ownership in diversified properties as a part of his/her asset management.
REITs not only provide capital investment, but they are also income for investors. The income stream is mainly from rental income. Each month, the managers provide income distributions that are generally consistent. This is a great vehicle for someone looking for high dividends found in large corporations.
As inflations rises, corporate profits become relatively lower. Stocks, therefore, are exposed to inflation risks. However, REITs can act like inflation hedges. While the cost of living rises, rental income can rise as well. So rising rental income can offset the inflation factor.
REITs provide a great way for investors to diversify their holdings. Asset management will benefit by the tax advantages, inflation hedging capabilities, geographical diversity and most importantly, portfolio diversity. For more information about REITs, consult your financial planner or contact a major mutual fund company.