Real Estate Investment Trust (REIT) is an investment vehicle that offers real estate holdings. It resembles mutual fund investing with a diversified investment array; In addition, it has some tax benefits. In asset management, REITs can provide diversification for a portfolio.
Because of the unique nature of REITs, a fund that invests in real estate holdings can provide a good way to hedge the stock and bond markets. If you remember, right after the internet tech boom in the late 1990s, there was a major market correction. The stock market fell significantly and the volatility in the stock market caused investors to worry. As the capital market drifted away, more investors were looking for other forms of investment, including real estate.
Real estate subsequently boomed due to low interest rates and interest in new forms of investment. As housing increased in popularity, the median price per home increased as well. With stock prices falling, real estate became the safe haven that concerned investors were looking for.
REITs can be a good investment option for asset management purposes. Not only does it provide diversification, but it also provides consistent returns. In fact, the REIT has provided an average annual return of roughly 12.6% over the past 30 years (an average return of 12.6% every year). A popular benchmark, the S&P 500, has returned 12.2% over the same time frame. Even with modest gains on the S&P, a difference of .4% can provide a cumulative return over the long run.
REITs also have tax advantages. Since 90% of the profits are returned directly to the investors, double taxation is avoided. Typical corporate profits are taxed twice because taxes are levied first at the corporate level and then with the individual shareholder.
REITs also have the flexibility of stock funds. Under proper portfolio management, they can provide liquidity by selling their holdings without any restrictions. This enables managers to invest in other real estate that may be hot at the moment.
These trusts can also be diversified across different geographic locations and real estate types such as corporate offices and homes. For only a few thousand dollars as a minimum investment, an investor can enjoy the benefits of ownership in diversified properties as part of their wealth management.
REITs not only provide capital investment, but they also generate income for investors. The income stream is mainly from rental income. Each month, managers provide income distributions that are generally consistent. This is a great vehicle for someone looking for the higher dividends found in larger corporations.
As inflation rises, corporate profits tend to be lower. Stocks, therefore, are exposed to inflationary risks. However, REITs can act as an inflation hedge. While the cost of living increases, rental income may also increase. So rising rental income can offset the inflationary factor.
REITs provide an excellent way for investors to diversify their holdings. The asset management will benefit from tax advantages, inflation hedging capabilities, geographic diversification and most importantly, portfolio diversification. For more information about REITs, consult your financial planner or contact a major mutual fund company.