Tuesday, October 5, 2010
REIT's for real estate investing
Almost every conventional financial adviser will recommend diversifying invested assets to safeguard against loss if one sector of the economy underperforms. The common advice is to split the sum to be invested into some combination of stocks, bonds, cash or CD’s, precious metals and real estate. The amount invested in each sector will vary with age, total amount invested, desired annual growth/income, and the beliefs of each financial adviser.
I am not a strong personal fan of that style of diversification. I do still believe in keeping at least a portion of funds invested in real estate. Real estate, in my opinion, should be looked at as a hedge against economic downturns and inflation, similar to the way most investors look to gold. Real estate should not be looked at as a way to get rich quick, but owning a few houses occupied by renters or owner-financed buyers can provide a steady monthly cash-flow with little work and possible tax advantages.
Most average investors either don’t have the funds or the willingness to own and manage their own real estate investments. There is an alternative available giving investors almost all of the advantages of owning real estate without having any management responsibilities. Real Estate Investment Trusts(REIT’s) were started in the U.S. in 1960 to provide a sort of mutual fund for real estate.
REIT’s must follow some basic rules. They must hold at least 75% of total investment assets as real estate and derive at least 75% of gross income from rents or mortgage/interest payments. A REIT must be jointly owned by 100 people or more and be managed by a board of directors or trustees. At least 90% of income must be distributed to investors as dividends.
Owning shares of a well managed REIT therefore has advantages even over most stocks. Not only does an investor get the benefit of rising share price but also of unusually hefty dividend payments. So far in 2010, REIT’s have been vastly outperforming all of the main market indexes. There are many to choose from and most specialize in one type of property: hospitals, assisted living communities, single-family homes, large apartment buildings, commercial retail, manufacturing, etc… This fact makes it possible to stay diversified within the real estate sector.
I ran a very basic stock screen to see what would turn up. I chose real estate, $10 to $500 per share, $10-million to $10-billion market capitalization, outperforming the 50-day moving average and outperforming the DJIA by 5% or more. This simple search gave me 15 REIT’s to choose from on October 4th, 2010. Five of these have increased share price by more than 20% since the beginning of the year.
The top performer is Saul Centers Inc.(BFS), up 30.8% YTD and closely followed by Avalon Bay Communities Inc.(AVB) with a 30% YTD gain. Developers Diversified Realty(DDR) is up 29% so far this year and Digital Realty Trust Inc.(DDR) is up 23%. Worst performing of the top five is Kimco Realty Crop.(KIM), which is up a mere 19.9% since January 1. The most expensive shares are Avalon Bay at $106, the cheapest are Digital Realty at only $11.91 per share. Remember, there is still a nice dividend to collect as well as the increase in share price. This is pretty impressive performance in the current economy!
If you want to diversify your investments into real estate but don’t want to be a landlord or have to deal with mortgage payments, or even the actual rehabbing and reselling of properties, consider adding shares of a few REIT’s to your portfolio. Do the homework, just like if you were buying a house. Look for proven past performance and high, steady dividends. Buy sectors you believe in: healthcare, commercial retail, etc… And like any other stock, don’t be an ostrich and just it ignore. Pay attention, check on it regularly and don’t be afraid to sell and invest elsewhere if performance starts to lag.