Real Estate Investment Trust (REIT) is an investment vehicle that provides real estate holdings. It is similar to mutual fund investments with a diversified investment matrix; In addition, it has some tax advantages. In asset management, REITs can provide diversification for a portfolio.
Due to the unique nature of REITs, a fund that invests in real estate can provide a good way to hedge the stock and bond markets. If you recall, right after the Internet technology boom of the late 1990s, the market underwent a major correction. The stock market went down sharply and worried investors due to the volatility of the stock market. As capital was withdrawn from the market, more investors were looking for other types of investments, including real estate.
Subsequently, real estate increased due to low interest rates and interest in new forms of investment. As the popularity of housing increased, so did the median home price. With stock prices plummeting, real estate became the safe haven sought by concerned investors.
REITs could be a great investment option for asset management purposes. Not only does it provide diversity, but it provides consistent returns. In fact, REITs have provided approximately a 12.6% average annualized return (12.6% return on average each year) over the past 30 years. A popular benchmark, the S&P 500, has returned 12.2% over the same time period. Even with the slight advantage over the S&P, the 0.4% difference can create cumulative returns over the long term.
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 as taxes are first levied at the corporate level and then with the individual shareholder.
REITs also have the flexibility of stock funds. With proper portfolio management, they can provide liquidity by being able to sell their holdings without restrictions. This allows managers to invest in other real estate that might be hot right now.
These trusts can even diversify among various geographic locations and types of real estate, such as corporate offices and homes. For just a few thousand dollars as a minimum investment, an investor can take advantage of diversified property ownership as part of their asset management.
REITs not only provide capital investment, but are also income for investors. The income stream comes mainly from rental income. Each month, managers provide income distributions that are generally consistent. This is a great vehicle for someone looking for high dividends found in large corporations.
As inflation rises, corporate profits become relatively lower. Stocks are therefore exposed to inflation risks. However, REITs can act as hedges against inflation. While the cost of living increases, rental income may also increase. Therefore, the increase in rental income can offset the inflation factor.
REITs provide a great way for investors to diversify their holdings. Asset management will benefit from tax breaks, inflation hedging capabilities, geographic diversity, and most importantly, portfolio diversity. For more information about REITs, consult your financial planner or contact one of the major mutual fund companies.