Posted by James Financial Services Inc

Buying REITs: What are they and what you need to know?

Buying REITs: What are they and what you need to know?

Real estate investment trusts (REITs) are the main concern when constructing any equity or fixed-income portfolio. They offer greater divergence, possibly higher total returns and/or lesser overall risk. To sum up, their competence to produce dividend income together with capital appreciation makes them an outstanding counterbalance to stocks, bonds, and cash.

Whether it is the properties themselves or the mortgages on those properties, REITs generally own and/or manage income-producing commercial real estate. Investments in the companies can be made individually, through an exchange-traded fund, or with a mutual fund. There are numerous types of REITs available.

We will take a look at a few of the major categories of REITS and their historical returns here. You should have a better idea when and what to buy by the end of this article.

Historical Returns of REITs

Historically, one of the most accomplished asset classes obtainable in the Real estate investment trusts. Most of the investors use to measure the performance of the U.S. real property market via FTSE NAREIT Equity REIT Index. Between 1990 and 2010, the mid-cap stock averaged 10.38% and the index's average annual return which was 9.9% comes second only over the same period.

In contrast, fixed income assets achieved 7% annual returns and commodities just 4.5% a year. In just two years out of 20, real estate was the worst performer of eight asset classes. However, fixed income was the worst performer six times in the same 20-year period.

In more recent times, the three-year mean for REITs between March 2013 and March 2016 was in line with the means in the 20 year period, attaining 11.21% over that time. Historically, investors searching for profit have done better investing in real estate than fixed income, the traditional asset class for this reason. A wisely constructed portfolio should contemplate both.

Retail REITs

Around 24% of REIT investments are in shopping malls and freestanding retail. By kind in America, this signifies a single major investment. Whatever shopping center you normally go to, it is possibly owned by a REIT. One first needs to scrutinize the retail business itself when considering a venture in retail real estate. Is it economically healthy currently and what is the standpoint for the future?

It is significant to remember that retail REITs earn money from the rental fee they charge to tenants. It is likely that they could hold back or even default on those monthly payments or in the end be forced into liquidation if retailers are experiencing cash flow problems due to low sales. At this time, they need to look for a new tenant, which could be hard. Thus, when investing in REITs, it is critical that you choose the toughest firmly secured occupants possible, which includes supermarkets and house improvement shops.

Your attention should turn to the REITs themselves once you have created your industry evaluation. Comparable to any investment, it is vital that there should be good proceeds, strong balance sheets and as little balance as possible, mainly the short-term kind. Retail REITs with significant cash positions will be presented with chances to buy good real estate at reduced values in a poor economy and the best-run businesses will take benefit of this.

With that, since shopping is gradually stirring towards online as opposed to the mall model, there are extensive concerns for the retail REIT. The subsector is pressured but proprietors of space are persistent in innovating to fill their space with offices and other non-retail concerned occupants.

Residential REITs

Residential REITs are the ones that possess and run multiple family apartment buildings, including constructed housing that are for lease. One should study several aspects before hopping in when looking to invest in this type of REIT. For example, the finest apartment markets are likely to be where the home is inexpensive compared to the rest of the country. In locations similar to New York and Los Angeles, the expensive cost of single homes compels more people to rent, which causes to increase the price that the landowners can charge each month.

Investors should search for population and job growth within each definite market. Generally, when jobs are readily offered and the economy is developing, there is a net inflow of people to a city. A sign that demand is improving is a decreasing vacancy rate together with increasing rents. Residential REITs should do well as long as apartment supply in a specific market remains low and demand continues to increase. As for all companies, those with the strongest balance sheets and the most available capital usually do the best.

Healthcare REITs

As Americans age and healthcare charges keep rising, Healthcare REITs will be a remarkable subdivision to the lookout. Healthcare REITs gain income from the real estate of hospitals, medical centers, nursing facilities, and retirement homes. The accomplishment of this real estate is directly connected to the healthcare system. A mainstream of the operators of these amenities depends on occupancy fees, Medicare and Medicaid refunds as well as private pay. As long as the funding of healthcare is uncertain, so are the healthcare REITs. 

When you seek a healthcare REIT it is necessary that it contains a varied class of clients as well as investments in a number of diverse property types. Focus is good to a degree but so is dividing your risk. Generally, it is good for healthcare real property when there is a rise in the need for healthcare assistance which should occur with an aging population. Thus, search for companies whose healthcare experience is substantial, whose balance sheets are strong and whose access to low-cost capital is high, this is in addition to customer and property-type variation.

Office REITs

These REITs invest in office buildings. Rental income is received from occupants who have typically signed long-term leases. For anybody interested in investing in an office REIT there are four questions that spring up to mind:

1. What is the economic state and how high is the rate of unemployment?

2. What is the state of vacancy rates?

3. Economically, how is the part in which the REIT invests?

4. How much capital does it have for procurements?

Seek for REITs that invest in economic strongholds. For instance, it is better to own a set of regular buildings in Washington, D.C. than to own a leading office facility in Detroit.

Bottom Line

As far back as 1960, the federal government made it possible for investors to purchase into large-scale commercial real estate projects. In contrast, only in the last decade have individual investors accepted REITs. The explanation for this includes the low-interest rates that compelled investors to seek beyond bonds for income-producing investments, the emergence of exchange-traded and mutual funds concentrating on real estate, and an uncontrollable desire on the part of Americans to own real estate and other tangible assets up to the 2007-08 real estate collapse. Similar to every other investment in 2008, REITs agonized significantly but despite that, they still remain to be a brilliant addition to any expanded portfolio.

James Financial Services Inc
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