Investing in REITs: The What And The Why From NPR
The purpose and the process of investing in a real estate investment trust (REIT) is unclear to many, even though it’s the most cut-and-dried way to put capital into commercial real estate. Some struggle with understanding the notions of portfolio management, and questions about what properties are being invested in and why keep an investor from making the leap. Others wonder about returns: how do rents and other building cash flows become dividends or push the REIT share price in one direction or another?
The personal perspective on these aspects of REITs is not often explored by mainstream media, and when it happens, it’s worth checking out. National Public Radio’s Uri Berliner recently produced an excellent program on the REIT scene by letting us follow along with his journey as an investor.
At times both enlightening and worrying, Uri’s piece explores the basic financial plumbing behind the REIT concept and sets REITs up in comparison to other means of real estate investment in a compelling way. The worrying part: the reappearance of the “B” word: bubble.
Josh Dorkin runs a real estate investment website called Bigger Pockets. I asked him what kind of real estate bet I can make for $1,000. His advice: Be careful.
“We’re kind of in a bubble once again,” he says. “We’ve got these low interest rates; we’ve got the big money funds coming into the market. And of course if you’re savvy and know what you’re doing, there’s always going to be an opportunity.”
Dorkin runs me through my options.
“You could go and flip a house. Of course, you’d need to go out and take out a high-risk loan more likely than not to do that and of course doing that is really kind of like running a job in itself.”
“Other options include crowdsourcing or syndication.”
“And I think the final option is really to go out and buy shares of a REIT — real estate investment trust.”
REITs are sold like stocks, and they’re held by many individuals and institutional investors. You might have a REIT in your retirement fund. REITs are trusts that own and develop property and earn rental income. Most of it gets passed on to investors.
“They are forced by law — a law created in 1960 — that provides that real estate investment trusts have to meet certain tests,” says Brad Thomas, editor of the Intelligent REIT Investor. “And if they do, they are forced to pay out 90 percent of their taxable income in the form of dividends.”
Those dividends are a regular stream of income, and they’re what make REITs attractive to investors. In a rising real estate market, they’re what clinch it for me.
I put down $513.94 on a REIT index fund. It’s basically a smorgasbord of many different REITs. It contains what you might expect — REITs that own apartment buildings and shopping centers. But Thomas says the range of REITs today goes far beyond that, “from billboards to prisons to cell towers, campus housing. Even solar is on the horizon potentially.”
With so many kinds of businesses seeking to become REITs, the Internal Revenue Service has begun reviewing some conversion applications to determine whether the companies truly qualify as real estate firms. In other words, are they really landlords? The REIT structure can allow companies to significantly reduce their tax bills. The fund I’ve bought only includes existing REITs, not firms hoping to convert to them.