Real Estate Investment Trust (REIT) is an investment vehicle that provides real estate. It is similar to investing in mutual funds with a diversified investment range; moreover, it has certain tax advantages. In asset management, REITs can bring diversification to a portfolio.
Due to the unique nature of REITs, a fund that invests in real estate can be a good way to hedge the stock and bond markets. If you remember right after the internet technology boom in the late 1990s, the market went through a major correction. The stock market fell significantly and worried investors due to volatility in the stock markets. As capital retreated from the market, more and more investors sought other types of investments, including real estate.
Real estate then surged due to low interest rates and interest in new forms of investment. As the popularity of housing increased, the average price per house also increased. As stock prices plummeted, real estate became the safe haven for worried investors.
REITs could be a great investment option for asset management purposes. This not only offers diversity, but also consistent yields. In fact, REITs have provided approximately an average annualized return of 12.6% (12.6% return on average each year) over the past 30 years. A popular benchmark, the S&P 500, returned 12.2% over the same period. Even with the slight advantage over the S&P, the 0.4% difference can provide cumulative long-term returns.
REITs also have tax advantages. Since 90% of profits go directly to investors, double taxation is avoided. Typical corporate profits are taxed twice since taxes are first imposed at the corporate level and then with the individual shareholder.
REITs also have the flexibility of equity funds. Under proper portfolio management, they can provide liquidity by being able to sell their holdings without any restrictions. This allows managers to be able to invest in other properties that might be hot right now.
These trusts can even be diversified across various geographic locations and types of real estate like offices and homes. For just a few thousand dollars as a minimum investment, an investor can take advantage of ownership of diversified properties as part of their asset management.
REITs not only provide capital investment, but they are also income for investors. The income stream comes mainly from rental income. Each month, the managers provide income distributions that are generally consistent. This is an excellent vehicle for someone looking for the high dividends found in large corporations.
As inflation rises, corporate profits decline relatively. Equities are therefore exposed to inflation risks. However, REITs can act as inflation hedges. As the cost of living increases, rental income may also increase. Thus, the increase in rental income can offset the inflation factor.
REITs offer investors a great way to diversify their holdings. Asset management will benefit from tax advantages, inflation hedging capabilities, geographic diversity and, most importantly, portfolio diversity. For more information on REITs, consult your financial planner or contact a large mutual fund company.