By Clark Kendall
This may be a great time to get into a Real Estate Investment Trust, or REIT. If you’re trying to sell commercial or residential real estate in Montgomery County today, you face quite a challenge. On the other hand, buyers are seeing all kinds of opportunities to pick up properties at depressed prices.
You may want to seize these opportunities. But what if you don’t want to manage property? Is there a way to invest in real estate without becoming a landlord? Absolutely! REITs allow you to get into the commercial real estate sector without the hassle of property management.
You may assume that REITs, like other investments, have taken a pounding recently. You would be wrong. In fact, REITs have outperformed stocks in the last couple of years. The total return for the FTSE NAREIT All-Equity REIT Index was +27.95 percent last year. The total return of the FTSE NAREIT All-REITs Index was +27.58 percent. Compare that to a total return of +15.05 percent for the S&P 500.
With reduced real estate valuations and stricter credit terms, the present commercial real estate market has many distressed owners and properties. Now may be a prime time to get into a REIT in pursuit of dividends and long-term appreciation. According to data from Real Capital quoted by Bloomberg, the average capitalization rate on commercial properties (excluding hotels) was 7.2 percent as of 4Q 2010. Stack that up against the yield from a CD, a corporate bond or a 10-year Treasury!
What do you own when you invest in a REIT? An equity REIT offers fractional ownership of a real estate portfolio. The portfolio commonly includes high-quality commercial properties like shopping malls, apartment buildings, office complexes, golf courses and resorts. Another benefit of a REIT is it has no investment minimum, so it allows the small investor an easy entry into the “major leagues” of commercial real estate.
While investors own common shares in the REIT, there is a wrinkle that distinguishes a REIT from a corporation. A REIT doesn’t get to decide what to do with its after-tax profits. It must pay out 90 percent of its taxable profits as dividends. This exempts a REIT from having to pay corporate income tax.
There are three basic types of REITs.
• Equity REITs invest in hard assets (real property) and most of them specialize in a specific income property type. There are apartment REITs, retail REITs, movie REITs, industrial REITs and so forth. Two D.C.-area REITs with a terrific long-term track record are Washington REIT, ticker symbol WRE, and Federal Realty, ticker symbol FRT.
• Mortgage REITs take out short-term loans to buy mortgage-linked securities. Their profits stem from the difference between the long-term interest rates of the bonds and the short-term interest rates paid on the loans.
• Hybrid REITs invest in commercial properties and mortgage-linked securities.
In addition, there are traded and non-traded REITs.
• Public REITs trade on an exchange, and therefore offer more liquidity to an investor. The downside is that they also expose an investor to market volatility.
• Private REITs are not (yet) publicly traded and reduce the degree of volatility for the investor. Liquidity can be an issue as you have to sell shares through the REIT company unless another investor in the REIT steps up to buy them.
What kind of investment income does a REIT provide? The monthly dividend income from a REIT is often around 7 to 8 percent. Plus, investing in real estate through the REIT gives you a diversification you couldn’t possibly attain as a small investor, a quality of property management that the small investor seldom sees, and the leadership of veteran commercial real estate investors making the buy-and-sell decisions … along with the potential for a nice dividend!
Clark Kendall is the only professional worldwide with Chartered Financial Analyst (CFA), Certified Financial Planner TM (CFP®) and Accredited Estate Planner (AEP) designations. With more than 25 years of seasoning in investment management and wealth management strategies, Clark is also a former equity seat holder on the New York Stock Exchange (NYSE). Clark is focused on providing intelligent and independent, financial direction to individuals and families located in Montgomery County. He may be reached at firstname.lastname@example.org or 301-838-9110. You can also visit him on the Web at www.kendallcapital.com
This story was published in the May/June 2011 issue of Montgomery Magazine.