I've always invested in plain vanilla stock funds, but lately I've been thinking of branching out a bit. I've noticed that REITs have really done well lately. What do you think about them? --O.L.Dear O.L.,
Real estate investment trusts (usually known as REITs, but also called real estate stocks) enjoyed a total return of 37.5 percent last year, according to the SNL Equity REIT Index. So you're not the only one paying attention to this unique investment.
Not surprisingly, when we asked members of the Armchair Millionaire community about their experience with REITs, we heard some positive responses. Here are two:
"I invested in a group of REITs designed by my broker 19 months ago and am up by 20 percent, so I am very happy." --Posted by Jean L.
"I have invested in REITs and have been pleased with the dividends and the increase in the value of my shares. If they continue to do well I will add more shares next year." --Posted by John T.
REITs offer an easy way to invest in real estate without having to deal with the hassle of actually buying, maintaining and selling property yourself. If you think they might be right for you, read on. My guide will help you learn more.
The Armchair Millionaire's Guide to REITs
- What they are. In a nutshell, REITs are companies that own and usually operate income-producing property. This can include everything from shopping malls to office buildings to resorts, although many REITs specialize in one type of property, and some may specialize in one region of the country. According to the National Association of Real Estate Investment Trusts, the REIT industry trade group, there are about 180 publicly traded REITs available today.
- Who they're for. Because they are required by law to distribute at least 90 percent of their taxable income to their shareholders every year in the form of dividends, REITs can be attractive to people who are looking for current income from their portfolios (such as retirees), as well as people who want the diversification that real estate provides.
- How to buy REITs. You've got two alternatives here. First, you can buy shares of REITs just as you would buy shares of stock. To do so, you'll need to go through a broker. Your second choice (and in my opinion, the better choice for someone just getting started investing in REITs) is to buy a mutual fund that invests in REITs. Real estate funds are offered by many of the big mutual fund families, so you'll have plenty of choices.
- REITs in your portfolio. One attractive feature of REITs is that they tend to have a low correlation with stocks. In other words, even if stocks--as an asset class--are down, REITs may be up or down, and vice versa. In this way, REITs add balance to a mostly stock portfolio. However, if you already own a home, consider that you may already have effectively diversified your portfolio with real estate.
- Digging deeper. I've only scratched the surface of a fairly complex type of investment. Before you invest, I urge you to learn more. A good starting place is the Web site of the National Association of Real Estate Investment Trusts, found at www.nareit.com.
THE BOTTOM LINE: While it's true that REITs had a banner year in 2003, they should still only be considered as one part of a common sense portfolio. Just as you shouldn't chase a hot stock, neither should you buy REITs just because they've enjoyed great returns lately.
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