Real Estate Investment Trust (REIT) is an investment vehicle that provides real estate. It resembles mutual fund investments with a diversified investment portfolio; 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 equity and bond markets. If you remember, right after the internet tech boom of the late 1990s, the market experienced a major correction. The stock market was down considerably and investors were concerned due to the volatility of the stock market. As capital moved away from the market, more investors sought other types of investments, including real estate.
Subsequently, the real estate sector soared due to low interest rates and interest in new forms of investment. As the popularity of housing increased, so did the median price per home. With falling stock prices, real estate became the safe haven for concerned investors.
REITs could be a great investment option for asset management purposes. Not only does it provide diversity, it provides consistent returns. In fact, REITs have provided roughly 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 edge over the S&P, the .4% difference can provide long-term cumulative returns.
REITs also have tax advantages. Since 90% of profits are returned directly to investors, double taxation is avoided. Typical corporate earnings are taxed twice, as taxes are taxed first 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 may be hot at the moment.
These trusts can even be diversified 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 primarily 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 inflation hedges. While the cost of living goes up, rental income can go up too. 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 advantages, inflation hedging capabilities, geographic diversity, and most importantly, portfolio diversity. For more information on REITs, consult your financial planner or contact a major mutual fund company.