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Is Now The Time To Invest In REITs?


REITs

Is now the time to invest in REITs? Real Estate Investment Trusts, commonly known by their acronym REITs, have made a healthy run higher in recent years, but have begun to pull off of recent highs, due to anticipated interest rate hikes by the United States Federal Reserve. In fact, REITs have sold off approximately 10% from their early 2015 highs.   This makes investing in REITs more attractive, but is it really the time to invest in REITs with interest rates expected to rise? This is a hard question to answer, but looking at past performance can yield some clues.

Is Now The Time To Invest In REITs?

Federal ReserveStock market participants appear to be selling REITs in anticipation of the Federal Reserve rate hikes that are expected later in 2015. The assumption is that if rates are not hiked in September 2015, they will be by December. However, even that later date is quite tentative, as the Federal Reserve is reacting to incoming economic data. If the data weakens during 2015, the rate hikes could be put off until 2016. Some even speculate that Federal Reserve interest rate hikes are unlikely before the fall 2016 election.

Why does it matter to the stock prices of REITs if the Federal Reserve raises rates sooner rather than later? Because REITs finance their operations by using a considerable amount of short to medium-term borrowing. REITs borrow heavily to maximize their real estate holdings.   This works well for expanding their businesses more quickly; however, it also makes REITs quite sensitive to changes in interest rates. As interest rates rise, the cost of doing business also rises for debt-laden REITs.   The rise in interest rates may not affect them right away, but once they look to roll over or expand their loans, they will be hit with higher interest costs.

Average In To Invest In REITs

Invest In REITsInterest rates have been stuck at multi-decade lows since the financial crisis of 2008 / 2009. Sooner or later, the Federal Reserve is going to start raising rates, and it this will have implications for REIT’s stock prices.

Since the interest rate increases have not even begun yet and REITs are already selling off, is now the time to invest in REITs?   It is probably not an ideal time to invest in REITs, but there are many factors that affect stock prices and investor’s perceptions of different stock sectors. Keeping this in mind, it could be a good time to initiate an investment in REITs with a small investment. If REITs fall in price as the Federal Reserve raises interest rates, an investor can average in and buy additional positions until they have purchased the total amount that they intend to invest in REITs.

Invest In REITs For Income

One reason that REITs are so attractive to invest in is because they receive special tax treatment by the Internal Revenue Service (IRS), due to laws passed by Congress. REITs deduct dividends paid to shareholders, which are technically the owners of the companies, from their bottom line earning. In order to be able to deduct dividends paid to shareholders from their federal tax bill, REITs have to distribute at least 90% of their taxable income to REIT shareholders. REIT shareholders then pay federal taxes on their REIT dividends as ordinary income.

What this all means is REITs pay high dividends and will continue to pay high dividends for the foreseeable future, as long as federal tax policy provides them special treatment for paying out most of their income as dividends. This makes REITs excellent investments for those seeking income from their stock holdings.

REITs are not high-flying stocks that can be expected to gain a lot in nominal share price in the short or even long-term.   But, they are solid dividend payers that pay well above the paltry amounts that savings accounts pay. It is best to look at REITs as good vehicles for diversifying an investment portfolio into real estate and for earning income, as opposed to viewing them as long-term stock holdings. Over a long period of time, an investor just needs to continuously earn money from REIT dividends to make significant amounts of money holding REITs. The nominal price of their REIT shares are not relevant to long-term holders seeking income.

Which REITs Are Best To Invest In?

Look for REITs that have less exposure to debt or that have debt tied to longer-dated securities. Also, keep in mind that many REITs pay healthy dividends, so you can get paid while you average in and wait for them to eventually recover once the interest rate increase effects have run their course.

The following are some high-yielding REIT funds that make investing in REITs relatively easy. The funds trade on stock exchanges just like stocks, but spread out the risk of owning REITs among numerous companines. The funds pay healthy dividends that are suited for investors looking to generate income from their investments. See their current annual rates of return in parentheses.

  • iShares U.S. Real Estate ETF (NYSE: IYR 3.58%) tracks the investment results of an index composed of equities in the real estate sector called the Dow Jones U.S. Real Estate Index.
  • iShares Mortgage Real Estate Capped ETF (NYSE:   REM, 12.88%) tracks the investment results of an index composed of real estate investment trusts that hold residential and commercial mortgages.
  • UBS ETRACS Mthly Py 2xLvg Mortg REIT ETN (NYSE: MORL, 19.65%) holds mortgage REITs in the Market Vectors Global Mortgage REITs Index. MORL is designed to pay out two (2) times the dividends of the REITs that it holds. Index Fund is designed to replicate investment results that correspond generally to the price and yield of the S&P United States REIT Index.

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Investing In REITs To Earn a Decent Rate of Return


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Investing In REITs | What REITs Are

Investing In REITsInvestors looking to do better than the paltry returns offered by savings accounts and money market funds should consider investing in REITs.  A REIT is a commonly used acronym for a Real Estate Investment Trust, which is defined as any corporation, trust or association that acts as an investment agent specializing in real estate or real estate mortgages.  A REIT is a company that owns, and in most cases, operates income-producing real estate.  REITs typical own a variety of real estate that can include but is not limited to:  office buildings, apartment complexes, warehouses, shopping centers, and hotels.  Some REITs are focused on owning specific types properties, such as apartment buildings, and offer a way for investors to engage in focused real estate investing.  REITs also include companies that are involved in financing real estate purchases and ownership via the real estate mortgage industry.

REITs have certain business practices and tax conditions that make them appealing to investors seeking income from their investments.  With interest rates paid on savings placed in savings accounts and money market funds at or less than 1%, REITs also offer an attractive investment alternative for investors looking for places to invest their money to earn a decent rate of return.

REITs are provided special tax treatment under United States federal income tax law.  A REIT can deduct dividends paid to its owners (shareholders) to avoid paying taxes to the federal government.  REITs must distribute at least 90% of their taxable income to the owners, who are REIT shareholders.  Federal taxes are paid on REIT dividends by REIT shareholders as regular income.  Publicly held REITs have their shares listed on public stock exchanges, and the shares can be bought and sold in the same way that stocks are bought and sold.

Investing In High Yielding REITs That Finance Real Estate

REITs

The following are some of the highest yielding REITs available (current yields are in parentheses following the stock symbol).  Keep in mind that these companies finance mortgages and other real estate related financial products, and do not own hard real estate assets, and therefore may be more susceptible to impacts from economic downturns.

  • Annaly Capital Management, Inc. (NYSE:  NLY 12.10%) – Annaly Capital Management owns, manages, and finances a portfolio of real estate related investments, including mortgage pass-through certificates, collateralized mortgage obligations.
  • RAIT Financial Trust (NYSE:  RAS 9.00%) – RAIT Financial Trust owns and manages commercial real estate mortgages, mezzanine loans, commercial mortgage-backed securities (CMBS) eligible loans, other loans and preferred equity interests; investments in real estate or in entities that own commercial real estate; and investments in debt securities issued by real estate companies.
  • American Capital Agency Corp (NASDAQ:  AGNC 13.90%) – American Capital Agency invests in agency mortgage-backed securities.
  • Western Asset Mortgage Capital Corp (NYSE:  WMC 22.9%) – Western Asset Mortgage Capital is focused on investing in, financing and managing Agency residential mortgage-backed securities (RMBS).
  • Apollo Residential Mortgage, Inc. (NYSE: AMTG 11.10%) – Apollo Residential Mortgage is engaged the business of investing, on a leveraged basis, in residential Agency and non-Agency residential mortgage-backed securities (RMBS).

Investing In Moderate Yielding REITs That Own and Operate Real Estate

REIT Investment
The following are some examples of REITs that offer modest yields.  To justify the modest yields, these REITs own hard assets that will retain intrinsic value during economic downturns and lessen the chance of company failure.

  • BRE Properties Inc. (NYSE:  BRE 3.20%) – BRE Properties Inc. focuses on the development, acquisition, and management of multifamily apartment communities.
  • UDR Inc. (NYSE:  UDR 4.00%) – UDR, Inc. owns, operates, acquires, renovates, develops, redevelops, and manages multifamily apartment communities.
  • Avalonbay Communities Inc. (NYSE:  AVB 3.40%) – AvalonBay Communities, Inc. engages in the development, redevelopment, acquisition, ownership, and operation of multifamily communities.
  • Equity Residential (NYSE:  EQR 3.40%) – Equity Residential is involved in the acquisition, development, and management of multifamily properties.
  • Simon Property Group Inc. (NYSE:  SPG 3.10%) – Simon Property Group, Inc. engages in investment, ownership, and management of properties in real estate markets throughout the world.  Unlike United States focused REITs (which includes most REITs), Simon Property Group offers exposure to international real estate markets

Investing In REITs Mutual Funds and ETFs

The following are some examples of REIT mutual funds and exchange traded funds (ETFs) that offer a wide range of yields.  Mutual funds and exchange traded funds offer safety against the collapse of any single REIT, since they invest in numerous REITs that are engaged in various aspects of the real estate markets.

  • ING Clarion Real Estate Port Select (IVRSX 1.37%) – ING Clarion Real Estate Port Select invests in common and preferred stocks of REITs and real estate companies.
  • Vanguard REIT Index FundClass Inv (VGSIX 3.75%) – Vanguard REIT Index FundClass Inv tracks the performance of the MSCI US REIT Index.
  • Fidelity Advisor Real Estate Income A (FRINX 4.69%) – Fidelity Advisor Real Estate Income A invests in preferred and common stocks of REITs; debt securities of real estate entities; and commercial and other mortgage-backed securities, with an emphasis on lower-quality debt securities.
  • iShares U.S. Real Estate ETF (NYSE:  IYR 4.05%) – iShares U.S. Real Estate ETF tracks the investment results of an index composed of equities in the real estate sector called the Dow Jones U.S. Real Estate Index.
  • iShares Mortgage Real Estate Capped ETF (NYSE:  REM, 15.36%) – iShares Mortgage Real Estate Capped ETF tracks the investment results of an index composed of real estate investment trusts that hold residential and commercial mortgages.
  • First Trust S&P REIT Index Fund (NYSE:  FRI, 2.60%) – First Trust S&P REIT Index Fund is designed to replicate investment results that correspond generally to the price and yield of the S&P United States REIT Index.

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